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Nortel Sells Plants, Supplies Update

Light Reading
News Analysis
Light Reading
6/29/2004

Nortel Networks Ltd. (NYSE/Toronto: NT) hit the street running today, announcing the proposed sale of its remaining manufacturing operations to Flextronics Corp. (Nasdaq: FLEX) and saying that its updated financial refiling should be available in July (see Nortel Sells Plants to Flextronics and Nortel Provides Financial Update).

The agreement with Flextronics, which will net Nortel between $675 million and $725 million in cash, was widely expected since the beginning of the year (see Nortel Talks Outsourcing).

The deal with the contract manufacturer means Nortel won't be making any of its own products any more, a move it expects will save it up to $100 million a year after four years. Nortel's four-year manufacturing deal with Flextronics is worth $2.5 billion a year, and it will also enter a three-year product design services deal. About 2,500 Nortel employees are set to be transferred to the new owner.

The deal will include product integration, testing, and repair operations in Canada and Brazil, while Flextronics has also offered to buy Nortel's plants in France and Northern Ireland. The deal also includes some hardware and embedded software design assets in Canada and Northern Ireland, as well as Nortel's global repair services business.

Nortel will receive cash payments starting in the fourth quarter of 2004, subject to approval of the sale. The Canadian firm expects to incur sale costs of $200 million but to see a positive impact of $75 million to $100 million a year on net earnings after four years.

Meanwhile, Nortel investors are anxious for the company to get through its messy financial refiling, which has depressed its share price and resulted in board-level job losses (see Dunn's Done With Nortel , Nortel Gets Federal Subpoena, and Nortel Rattles Nerves).

Now the company is hinting that it sees the light at the end of the tunnel. While its previous updates have been non-committal (see Nortel Leaves All Doors Open), today's update on the refiling process and its impact on 2004 financial reporting provides a timetable of sorts. The highlights are:

  • Nortel expects to provide "updated assessments of the expected impacts of the restatements" on its financial statements from 2003, 2002, 2001, and the first quarter of 2004, in mid to late July. So, in about three to five weeks' time.
  • Preliminary unaudited results for the first and second quarters of 2004 are due to be released by mid August.
  • During the third quarter of 2004, Nortel expects to file financial statements for 2003 and the first two quarters of 2004, and then file any remaining amendments to any prior periods after that "as soon as practicable." This means Nortel will miss the August 2004 deadline for filing its report on the second quarter of 2004, so it will file a late filing report for that quarter with the Securities and Exchange Commission (SEC).

Nortel's share price today is up 6 cents, just over 1 percent, to $4.80, while Flextronics is up 43 cents, nearly three percent, to $15.80.

— Ray Le Maistre, International Editor, Boardwatch

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pengandy
pengandy
12/5/2012 | 1:29:57 AM
re: Nortel Sells Plants, Supplies Update
Flex get a good plant which is burden to Nortel
firstmile
firstmile
12/5/2012 | 1:29:54 AM
re: Nortel Sells Plants, Supplies Update
Will this be enough bail money for Frank and friends?
...first
fbgboy
fbgboy
12/5/2012 | 1:29:53 AM
re: Nortel Sells Plants, Supplies Update
Flex is the ultimate american outsource machine. If there is orders they go 24/7. No orders you are all let go the next day. I guess Nort had to dance with the devil that will pay them today.
Not sure if this is good or bad news. May or may not be trendsetting. Less profit. less risk. Being conservative is the post bubble way.
materialgirl
materialgirl
12/5/2012 | 1:29:51 AM
re: Nortel Sells Plants, Supplies Update
Does this move make NT more or less attractive to CSCO? Who makes CSCO's stuff?
No-tell
No-tell
12/5/2012 | 1:29:50 AM
re: Nortel Sells Plants, Supplies Update
Good move for Nortel. Of all the big CEM's, Flextronics was the only one to which Nortel hadn't previously outsourced large portions of manufacturing; Nortel did deals with Sanmina/SCI and Solectron going as far back as 1998/1999 or so. Nortel has continued its conservative tradition by spreading the wealth to yet another manufacturer, thus trying to prevent any one manufacturer from controlling too much.

Also, of the big CEMs, Flextronics has the largest presence in China...this should be good for Nortel as (if, when, is more appropriate, I guess)China and Asia in general become more important for both (a) manufacturing cost reduction and (b) end consumers.

stephenpcooke
stephenpcooke
12/5/2012 | 1:29:48 AM
re: Nortel Sells Plants, Supplies Update
I was personally involved with Nortel's first manufacturing divestiture in 1999. At that time they divested parts of factories, but mainly product lines. Interestingly enough the company that I worked for at that time, Chatham Technologies (a metal-bender that made cell base station cabinets) was acquired by Flex a few years ago.

It has already been mentioned that conservative is the way to go in this market and, to a certain extent this is correct. You will always make more money if you own the plant that is running 2 or more shifts 5 days a week. The difficulty in this market is that keeping this run rate is not nearly guaranteed. What Nortel has achieved is that it has acquired some level of independence between its sales and manufacturing/inventory systems. Yes, their day-to-day costs will go down but so will their margins when they make a sale due to Flex making their investment back on the equipment manufactured.

Flex will get a few world-class manufacturing plants, I have been in all of them other than Brazil, that have significant capacity available to be sold to the next highest bidder. This will make a lot of sense to an equipment provider who is burdened with a quota for in-country content (as in the case of Brazil).

A side 'benefit' to this is that the timing of revenue recognition will be much more clear cut in that it will be much harder to ship empty boxes at the end of Q4 to meet the numbers.
turing
turing
12/5/2012 | 1:29:48 AM
re: Nortel Sells Plants, Supplies Update
You don't seriously think CSCO wants to buy NT do you? [and no, the contract manufacturer would have no bearing on an acquisition of that size]

Partnering is one thing, but a buyout gives real heart-burn, especially such different corporate cultures as CSCO and NT. It would be cheaper to take LU, but it would still be a huge cultural divide. (like NT buying Bay Networks)
Milano
Milano
12/5/2012 | 1:29:46 AM
re: Nortel Sells Plants, Supplies Update
Charam Bolouri used to be the king of Nortel's manufacturing, so what's in store for him now?

His know-how and interest used to be in pushing the goods to the shipping dock. Looks like Nortel wants to get out of that business...

...M
dodo
dodo
12/5/2012 | 1:29:40 AM
re: Nortel Sells Plants, Supplies Update
Milano

I was wondering about the Global operations group.

As far as the chap is concerned, I believe that when he gets the golden handshake, he will be laughing all the way to the bank. He is pretty comfortable in his west island house and lately he has managed to get himself on some board of directors in Montreal.

unless he is hired by one of the manufacturing companies

Looks like BAN will be a ghost campus pretty soon albeit that some tenants may take over some more floors.
Machavelli
Machavelli
12/5/2012 | 1:29:39 AM
re: Nortel Sells Plants, Supplies Update
Dodo,

Reality is, there will more Nortel ghost towns.

With the current imploded and contracted telecom market, I would bet all Montreal operations will be shutdown soon and the Ottawa region will contain the only Canadian Nortel operations.

Outsourcing manufacturing is a good move. It only took them 10 years to figure how successful outsourcing was for Cisco. But the problem still is there is no significant business out there.

Nortel is trumpeting every minor sale they get and this is not good according to the Mootley Fool site

"When a company starts trumpeting every single sale, or previewing good news before it is actually 'news,' look out !!!

http://www.fool.com/News/mft/2...

I believe more tough times are ahead, even Bill Owens has stated he has not ruled out further layoffs.

Mach
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