Nortel, AlcaLu in Asset Swap?
With the sale of its UMTS access assets to Alcatel-Lucent (NYSE: ALU) complete, Nortel Networks Ltd. is rumored to be in further negotiations with the Paris-based giant, but this time with an asset swap in mind. (See Alcatel Snags Nortel 3G Unit, Analysts: Alcatel Got a Bargain, and ALU Completes UMTS Buy.)
The speculation suggests that Nortel would trade its GSM infrastructure business in return for Alcatel-Lucent's enterprise PBX business. Whether the transaction might involve more of the French giant's enterprise business, or some amount of cash, is unknown.
Nortel's GSM infrastructure unit generates roughly $2 billion in revenues per year, giving it a market share of about 7 percent, according to a recent Unstrung Insider report. Alcatel-Lucent's PBX business is on course to generate around $1.2 billion in revenues in 2006 and includes a market leading position in the IP PBX market in Europe.
While we haven't yet found a source to corroborate this rumor, the rationale, as suggested by a number of industry contacts, goes like this:
Nortel wants to exit markets where it can't be a market leader or achieve a market share of at least 20 percent -- that much has been stated by Nortel executives on a number of occasions. GSM infrastructure (GSM/GPRS/EDGE equipment) is one of those markets. Nortel's influence in the GSM evolution equipment sector, which is dominated by Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), was diminished further when it sold its UMTS access business, as it could no longer provide the next step up to 3G.
Alcatel-Lucent, however, wants to be a bigger player in mobile infrastructure, a cut-throat business where profits can only be achieved by having the economies of scale that come with large market shares and revenues. Adding Nortel's GSM business to its portfolio would give it a market share of around 17 or 18 percent in a market estimated to be worth about $30 billion in 2006.
According to some industry sources, the French giant wanted Nortel's GSM infrastructure lumped in with the UMTS access business, but the two parties couldn't broker a deal at that time.
While Nortel doesn't see a future in 2G/3G GSM/UMTS infrastructure, it has ambitions to be one of the biggest enterprise communications players in the world, giving Cisco Systems Inc. (Nasdaq: CSCO) a run for its money.
While Nortel still has some key areas of the carrier market where it either is, or believes it can be, a significant player -- CDMA wireless infrastructure, 4G wireless, IMS, optical, metro Ethernet, and IPTV -- it has spent a lot of time and effort since Mike Zafirovski became CEO in tuning an enterprise strategy that will deliver significant revenues and growth. A major part of that strategy is its increasingly close relationship with Microsoft Corp. (Nasdaq: MSFT). (See Nortel Sees $1B From Microsoft Alliance, Nortel, Microsoft Speak Up, and Enterprise Keeps Nortel in Line.)
Taking on board Alcatel's PBX business would make it the market leader in Europe, where it trails Siemens Communications Group and Avaya Inc. , according to market share figures compiled by Infonetics Research Inc. .
Nortel and Alcatel-Lucent declined to comment.
— Ray Le Maistre, International News Editor, Light Reading