Should Nortel Be Sold for Parts?

Now that Nortel Networks Ltd. has filed for protection from creditors, it's natural to ask: What will the restructured company look like?

Nortel still owns some valuable technologies that could be sold. But will the stuff that's left be a viable company?

Nortel filed for Chapter 11 bankruptcy protection in the United States and requested a restructuring under the Companies' Creditors Arrangement Act (CCAA) in Canada. The latter is not equivalent to a bankruptcy filing. (See Nortel Files for Bankruptcy Protection and Canadian Gov't Supports Nortel.)

"Bankruptcy" doesn't always equate to "death," as the case of Redback Networks shows. (See Redback Closes a Chapter and Ericsson Offers $2.1B for Redback .) And Nortel is talking as if it's going to re-emerge after the restructuring is done.

Nortel didn't have to restructure just yet. It had the cash to easily cover a $107 million interest payment that was due tomorrow. But many analysts saw trouble down the line, with Nortel likely unable to pay off its total $4.5 billion in long-term debt.

By filing now, Nortel has "bought themselves a lot of time," as the restructuring could take a couple of years to sort out, says Barry Richards, an analyst with Paradigm Capital Inc.

Division bell
Analysts seem to agree that some pieces of Nortel will get sold off. The most obvious example is the Metro Ethernet Networks (MEN) division, which it's been offering unsuccessfully since September. (See Nortel to Sell Carrier Ethernet, Optical Biz.)

The question is whether all of Nortel could get sold off. Richards doesn't think so, but he believes divisions like MEN could form $1 billion standalone companies. They might not match the size of Cisco Systems Inc. (Nasdaq: CSCO), but "even a very profitable company that's got $1 billion or $2 billion in revenues can be meaningful," Richards says.

Many, though, think Nortel should be sold for parts.

"I think they should just split the company up into different technological segments, because I think it's one of those companies where the parts are more valuable than the sum," says Deb Mielke, principal analyst with Treillage Network Strategies Inc. "Wireless and the optical, to me, are their two most valuable assets."

The MEN division, which includes Nortel's optical business, is a prime contender for a selloff, either as a single chunk or in parts. An asset sale -- grabbing the products and technology but not the employees -- would seem a likely route, says Eve Griliches, an analyst with IDC .

"Having just seen the lab and the test equipment, anyone who pays for those assets is going to get a great deal," Griliches says. As for the employees, Griliches -- who'd worked at Nortel in the past -- thinks they would stand a decent chance of being hired by MEN's buyer. "There are probably at least 100 people in Ottawa you'd love to have."

Within optical networking, Nortel's 40-Gbit/s technology could be a prize. Rob Adams, vice president for competitor Ekinops SA , believes Nortel got a headstart with a means of transmitting 40-Gbit/s signals that optically behave like 10-Gbit/s signals -- making them easier to transport -- and that the rest of the industry is still catching up. "They spent years developing an ASIC team," Adams says. "Somebody has to pick up those ASICs."

Market blues
Considering how long a process the restructuring will be, it's natural to wonder: How will customers react?

Nortel's installed base of older equipment is relatively safe, as carriers are always reluctant to change vendors. If some of these products fall to new owners, the installed base would still get supported, writes analyst George Notter of Jefferies & Co. Inc. in note issued today.

But in the markets for newer products, Notter senses that a shift away from Nortel has already begun. "We believe that any pockets of newer Nortel infrastructure (particularly where's there's significant traffic growth) would be more apt to transition to other vendors," he writes.

As an example, he suggests metro optical gear, where Ciena Corp. (NYSE: CIEN) might benefit. And in long-haul WDM, Infinera Corp. (Nasdaq: INFN) had already been winning business away from Nortel -- Notter cites Level 3 Communications Inc. (NYSE: LVLT) as an example -- and Nortel's plight could accelerate that trend. (See Infinera Reaches Level 3.)

"We know of at least one specific customer situation in Europe where Nortel and Infinera are the two finalists for a WDM project. We now expect that Infinera would pick up that business," Notter writes.

— Craig Matsumoto, West Coast Editor, Light Reading

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