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Optical/IP

Proxim Has a Debt Dilemma

Enterprise wireless LAN equipment vendor Proxim Corp. (Nasdaq: PROX) will likely need to raise over $100 million to be debt-free, if it goes ahead with publicly announced plans to explore selling off part or all of its businesses.

Proxim, which currently has a market cap of just $25 million, said back in January that it had hired Bear Stearns & Co. Inc. “to explore strategic alternatives for the company, including capital raising and merger opportunities.”

The big problem with selling off its assets is that it needs to raise a heck of a lot of cash to make any sale worthwhile. For a start, the firm could owe corporate investors Broadview Capital Partners and Warburg Pincus millions if it sells up.

The firm's latest 10-K filing, dated March 16, 2005, says that in October of last year Warburg Pincus and BCP Capital surrendered all of their existing stock in exchange for common stock and newly issued Series C stock with a face value of $40 million and a liquidation preference that accretes at 8.75 percent per annum:

"[This] is due to be repaid in cash on October 22, 2012, at its fully accreted value of $80 million. In the event of change of control or material asset sale, it is required to be repaid immediately at its fully accreted value of $80 million."

And that's not all. Proxim's legal settlement with WLAN rival Symbol Technologies Inc. (NYSE: SBL) in September last year, required the firm to pay Symbol $22.75 million over the next two-and-a-half years, starting with the quarter that ended September 30, 2004.

So, Proxim really needs to make around $100 million from any sale if the aim is to fully pay off its debts.

Sources suggest Proxim would like to shed its Orinoco wireless LAN business and concentrate on its wide-area wireless networking. Proxim bought Orinoco from Agere Systems Inc. (NYSE: AGR.A) for $65 million in cash in 2002 (see Proxim Buys Agere WLAN Biz).

The other possibility is that Proxim sell off its Tsunami wide-area wireless networking business, which came with its merger with Western Multiplex in 2002. But everyone that Unstrung has spoken to says this is a path that Proxim really doesn't want to take.

Proxim itself refused to comment on any specific strategic alternatives.

The big question is -- even with the growth of the enterprise wireless LAN over the last years -- would the sale of the Orinoco business net Proxim the kind of cash it needs?

Some sources believe it perfectly possible that the firm could sell its wireless LAN business for more than enough, pointing to the fact that Proxim is an established player in a highly competitive market that recently saw Cisco Systems Inc. (Nasdaq: CSCO) pick up switch startup Airespace Inc. for a cool $450 million (see Cisco Buys Airespace).

But Proxim has indisputably been seeing some tougher times in the wireless LAN business lately. The firm issued a profit warning last December saying that Cisco's “unforeseen WiFi pricing action... and resulting pricing pressure” had contributed to “lower-than-expected WiFi product revenue.” (See Cisco Spirals AP Market .) The latest available enterprise 802.11 equipment sales figures from Synergy Research Group Inc. show that the firm was overtaken by both 3Com Corp. (Nasdaq: COMS) and Airespace in the fourth quarter of 2004 (see Enterprise Sales Soar in '04).

"The core bad decision that Proxim made was not to introduce a switch," says Craig Mathias, principal at Farpoint Group. "They just weren't keeping up with market trends."

But, in the end, Mathias reckons that Proxim's "marquee brands" will probably attract some form of buyer: "If you were a Tawainese ODM, for example, wouldn't you look at this?

"There is an even-money chance they will survive in some form," he concludes. "It would be a shame if they didn't -- they go back to the very roots of wireless LAN."

One other possibility is that a holding company could purchase the company. "It may not be a wireless or networking vendor that buys, but perhaps a financial firm or holding company who invests," a source tells Unstrung. "General idea in this case would be to take it private, restructure as a WAN-only company, and have a go at it." — Dan Jones, Site Editor, Unstrung

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