Nortel's Not Bankrupt Yet

Nortel Networks Ltd. might not be prepared to file bankruptcy any time soon, but the mere thought appears to be sending the stock reeling.

The company's shares on the New York Stock Exchange (NYSE) are down more than 25 percent today following a Wall Street Journal report that the company is seeking advice on the possibility of a bankruptcy filing. (See Nortel's New Chapter.)

No such move appears imminent. Between $2.6 billion in cash as of October and a decent credit rating, the company should be good for at least 12 to 18 months of liquidity, a Nortel spokesman told the Journal.

Today's stock plunge -- down 14 cents to 38 cents per share at press time -- brings Nortel's market capitalization to less than $200 million. As recently as September, Nortel was worth $1.5 billion. (See What's Nortel Worth?)

"It's killing the stock -- and the bonds, too," says one analyst requesting anonymity.

Whether today's report presents any markedly new information is debatable, as the possibility of a Nortel bankruptcy has been on people's minds for some time.

"It would be appropriate for them to start those kinds of discussions," even though Nortel isn't on bankruptcy's doorstep, says Barry Richards, an analyst with Paradigm Capital Inc.

Analyst Mark Sue of RBC Capital Markets recently shrank his target price for Nortel stock down to $0 -- yeah, zero -- in a Nov. 13 report ominously entitled, "The Last One."

"We think bankruptcy is a distinct possibility down the road," he wrote. He added that Nortel's cash should be enough to get through 2009, although things could get dicey after that.

Along similar lines, the fact that Nortel's bonds were trading at less than 21 to 41 percent of face value in November was a bad sign for the stock, analyst Kris Thompson of National Bank Financial wrote in a report back then. "If the bonds holders don't make it out at face value, then the equity shareholders are generally holding a worthless investment," he noted.

In trying to right the ship, Nortel CEO Mike Zafirovski has announced another round of job cuts and a plan to sell the Metro Ethernet Networks division. (See Nortel Culls 1,300 Jobs, Loses $3.4B, Crunch Time for Nortel, Nortel to Sell Carrier Ethernet, Optical Biz, and The Heavies Weigh In on Nortel.)

The MEN sale doesn't appear to be going anywhere, though. The Journal reports "nearly a dozen" potential buyers have looked at the division without coming to a deal. And analysts talking to Light Reading in recent weeks haven't come up with any new possibilities for buyers; many think Huawei Technologies Co. Ltd. remains Nortel's best bet. (See Huawei Seen as Likely Nortel Suitor.)

Nortel's future might not hinge on that sale anyway. Thompson's analysis says that even a sale price of $875 million, after subtracting out debt, wouldn't be enough to bring Nortel's bond levels above water.

One possibility that's been raised -- and one that Nortel is reportedly investigating -- is a government bailout, something that's been proposed (had you heard?) in certain U.S. industries recently.

Government involvement wouldn't be unprecedented, given the number of qualified pensioners Nortel has. "It's an enormous number to our population, the same way the auto industry is to the U.S. population," Paradigm's Richards says.

— Craig Matsumoto, West Coast Editor, Light Reading