Avaya Agrees to a $250M Prenup

PBX vendor Avaya Inc. will have to pay its private equity suitors, Silver Lake Partners and TPG Ventures , a kill fee of up to $250 million if it changes its mind about the current $8.2 billion takeover agreement, according to documents filed with the Securities and Exchange Commission (SEC) . (See Avaya Agrees to $8.2B Takeover.)

Avaya has 50 days, starting yesterday (Tuesday), to find a "Superior Proposal" to the all-cash offer from the private equity firms, which have formed a joint venture company called Sierra Holdings Corp. to execute the acquisition. If it does receive an alternative offer that's deemed financially superior, then discussions with the new bidder can continue after the agreed 50-day period, which ends July 24.

If Avaya terminates the current Sierra Holdings takeover deal because it accepts a better offer, it must pay a kill fee of $80 million, but if it terminates the deal without finding a "Superior Proposal," it faces a $250 million kiss-off payment.

The financial penalty works both ways, too. If the private equity firms get cold feet over the agreed deal and walk away from Avaya, they must pay the PBX firm $250 million.

A better offer isn't likely, though, according to Tim Luke at Lehman Brothers . In a research note issued Tuesday he writes, "we consider the deal rich. The purchase agreement gives Avaya 50 days to solicit other proposals, but we consider the premium significant enough to prevent a competitive bid."

Especially from Nortel Networks Ltd. , which is believed to have been involved in the Avaya bidding process. (See Nortel: Kissing Avaya Goodbya?)

Light Reading, you'll recall, first reported news that Nortel and the private equity firms were the most likely acquirers at a price "north of $20 a share." That report established that Nortel is indeed capable of making a play for Avaya and that some view Avaya's business as more valuable than the offer it has accepted already. (See Avaya Close to Deal .)

"With respect to competitive bids," notes Luke, "we believe Nortel was involved in the process, but, given the mixed state of its balance sheet, was likely unable to match such a rich offer."

But Inder Singh, who was a Prudential Equity Group LLC analyst until this morning, reckons there's a chance of an alternative offer, as "we believe other parties remain interested in Avaya," which has itself pulled the acquisition trigger this year. (See Singh Signs Off and Avaya Swoops on Ubiquity.)

Singh also predicts further M&A activity in the enterprise voice equipment market, which has been rife with merger gossip in the past year. (See Nortel, AlcaLu in Asset Swap? and Sources: Siemens, Nortel, Avaya Mull JV.)

"Consolidation swept through the larger telco equipment vendors last year, but we have seen relatively little consolidation among the enterprise-focused names. Although the current Avaya acquisition does not address the consolidation issue, we wouldn't be surprised to see more M&A activity in this space," wrote Singh in his research note.

— Ray Le Maistre, International News Editor, Light Reading