In what is being regarded as one of the largest corporate failures in Canadian history, the Nortel auction began with the sale of its wireless business unit to Nokia Siemens Networks (NSN).
The deal announced late on Friday calls for Nortel to sells its wireless assets to NSN for $650 million, which is less than the annual revenues made by the unit, which includes both the CDMA business and LTE assets.
Under the terms of the agreement, at least 2,500 employees working in Canada, the U.S., Mexico and China will be able to maintain their jobs working for NSN. The transaction is a “stalking horse” deal under Delaware bankruptcy law, meaning that a rival might be able to trump it with a higher offer however that seems unlikely at the present moment.
By acquiring Nortel’s CDMA business, NSN will be in a good position to migrate some of that installed base as it evolves to LTE via either an HSPA overlay, which is the strategy being pursued by Bell Mobility and Telus with NSN and Huawei, or through an EV-DO Rev B upgrade followed by bridging technologies such as eHRPD (evolved High Rate Data Packet).
Nortel’s CDMA customer pedigree includes operators such as Bell Mobility, Telus, Verizon Wireless, Sprint, KDDI and China Telecom, among others. On the LTE side, Nortel has established some traction with KDDI and T-Mobile International AG (where it was trialing the technology). From an LTE IP perspective, NSN will be able to leverage Nortel’s SON (Self-Organizing Networks) solution.
One key strategic consideration for NSN is that the deal helps it bolster its presence in North America, which has been its Achilles heel for a while. While NSN has historically been strong in regions such as Europe and Asia / Pacific, the company generates only approximately 5 percent of its global revenues in North America, which represents its weakest region.
This also explains NSN’s commitment to maintain a large percentage of Nortel’s wireless business workforce in North America. EDC (Export Development Canada, the government-owned export credit agency) also got involved, which is another interesting aspect of the deal, since it usually assists Canadian exporters and investors expand their businesses abroad. The EDC is throwing its support to the deal by offering $300-million toward a credit facility for NSN. This also represents a turn-around for the EDC, which previously was only willing to make $30 million available to support Nortel until July 30th, which indicates the skepticism that the Canadian Government had in the ability of Nortel’s management to turn things around after entering creditor protection in January.
This deal does raise quite a few questions, including the issue of valuation. Perhaps Nortel’s leadership outplayed its hand, holding out in hopes the company would get a better valuation for their assets. The $650 million represents a smaller value than some pundits expected Nortel to get, which might also impact the sale of other units, including its Enterprise, Metro Ethernet Networks (MEN), global services, and carrier infrastructure (media gateway and MSS multiservice switch product lines) businesses. The Enterprise Division is widely expected to be sold within the next week or so, and potential suitors include Siemens Enterprise Communications (a JV between Gores Group LLC and Siemens) and Avaya (owned by private equity firms Silver Lake Partners and TPG). The odds are slightly higher for the former to win the bidding, but given the price of the wireless sale to NSN, the valuation of the enterprise business unit is not expected to reach $500 million, which represents a drop of over 50% of the valuation that it would have gotten last year before the downturn that precipitated the downfall of Nortel.
The sale to NSN certainly marks the end of an era. The downfall of Nortel is expected to have profound ramifications in the Canadian telecom and R&D landscape. Nortel not only was the largest R&D spender in Canada (for instance in 2007, it outspent RIM, which was second on the list, $1.8 billion to $254 million) but also spawned over 250 high-tech startups over the years. In addition, the company also established some key funding research partnerships with educational institutions such as the University of Toronto, and that effort yielded industrial quality research from academic research. It will certainly be tough to fill in those shoes, but from a Canadian perspective, one would hope that industry players such as Sir Terry Matthews (one of Canada’s most successful serial high-tech entrepreneurs) might at least help partially offset the void left by Nortel.Ronald Gruia, Programs Leader and Principal Analyst at Frost & Sullivan, writes the Analyst’s Corner column for MobilityTechzone. To read more of Ronald’s articles, please visit his columnist page.
Edited by Stefania Viscusi