15 January 2009

Nortel files for bankruptcy protection

Facing $107-million interest on debts, former telecom giant will likely be broken up and sold to foreign rivals.

Former technology titan Nortel Networks Corp. filed for bankruptcy protection Wednesday, a move that will likely see what was once Canada's great corporate success story broken up and sold to foreign rivals.

Nortel's board of directors was meeting last night to deal with a financial crisis, as the economic downturn translates into a sharp drop in orders from phone company clients. The telecom-hardware manufacturer failed to find buyers for a number of divisions that were put up for sale in September, and faces the prospect of paying $107-million (U.S.) of interest on its debts tomorrow.

“It is an iconic Canadian name and there will be a great national grieving over this,” said one person familiar with Nortel's plans.

The company's already crushed shares plunged further in European trading Wednesday as investors absorbed the development, falling to as little as the equivalent of 35.41 cents Canadian on the Frankfurt Stock Exchange, before inching back to 37.66 cents, down 2.9 cents from Tuesday's close.

oronto-based Nortel applied for court approval for creditor protection in Delaware Wednesday morning. It was expected to file in Toronto, as well. Nortel executives had no comment yesterday on the company's plans.

Opting for creditor protection marks an incredible fall from grace for a telecom manufacturer that is almost as old as the telephone. Nortel easily qualified as the country's largest company at the peak of the tech boom in 2000, with a $366-billion (Canadian) market capitalization and 95,000 employees.

While still North America's largest telecom equipment maker, Nortel's shares were worth a total of just $192-million yesterday, and the company has 26,000 staff after a bruising series of layoffs over the past eight years. Nortel stock that soared to $1,231 at the peak of the tech bubble – reflecting a recent consolidation in shares – closed yesterday at 38.5 cents on the Toronto Stock Exchange.

Court protection from lenders, and the breakup that will likely follow, would mark the end of chief executive officer Mike Zafirovski's four-year attempt to turn Nortel around. Mr. Zafirovski was parachuted into the top job in 2005 after successful stints at General Electric and Motorola. But he was never able to right a company plagued by a series of accounting scandals – one of his predecessors faces fraud charges – and weakening demand for its products.

While not bankrupt – the company has an estimated $1-billion in its coffers – Nortel is burning though cash at an impressive clip, and has $4.5-billion (U.S.) in long-term debt. Major lenders include JPMorgan Chase, Citigroup and Royal Bank of Canada. Seeking court protection would give the company more latitude in selling or restructuring factories and research facilities. Air Canada, for example, went this route in 2003, continuing to fly while cutting jobs and reworking its debts. Duncan Stewart, an analyst at DSAM Consulting in Toronto, said: “The issue is not whether or not they can pay it. … It's the idea of: If you know you're eventually going to default anyway, why not do it now and keep the … interest payments you would have shelled out?”

Typically, companies do not file for bankruptcy protection until they have drained most of their cash. But the deepening global credit crunch had raised concerns that a troubled company such as Nortel would not be able to raise enough money to finance its operations during bankruptcy proceedings.

The court filing will come as a shock to the company's bondholders, who had expected Nortel to pay its debts this week. Shareholders will likely see their holdings all but wiped out.

As a consequence of filing for protection, Nortel can expect to lose significantly more business, potentially sending the company into a death spiral, analysts say.

The sophisticated equipment made by Nortel carries an expectation from customers – the major phone companies – that the manufacturer will be around to service networks. One of the reasons the auto makers gave last month for resisting calls for them to file for bankruptcy protection was that potential customers would not buy from a manufacturer they did not think would be around to service the vehicles. For the network equipment industry, that fear is justifiably magnified.

When Nortel said in September that it would put its Metro Ethernet Networks division up for sale – it makes hardware that carries Internet traffic – revenue fell on fears of sustainability and service.

Now Nortel faces the prospect of selling additional divisions to pay down debts, all under the supervision of a judge. In addition to selling the Ethernet unit, divisions that could go on the auction block include the carrier networks unit, which sells gear to phone companies, and the enterprise division that sells telecom equipment to businesses. Potential buyers for these units are all foreign: Nokia Siemens Networks, Telefon AB LM Ericsson, Cisco Systems Inc. and China's Huawei Technologies Co. Ltd.

Nortel's storied history in the telecommunications field dates back nearly as far as the telephone itself. The company was founded in 1895 as Northern Electric Manufacturing Company to begin selling telephone equipment to other companies as Canada built out its first telecom network.

Throughout the first half of the 20th century, the company's telecom gear business grew steadily, but Nortel also built telegraphic equipment used on the battlefields of the First World War as well as the first sound system in Canada for talking movies.

In the 1950s, the company developed electromechanical switches, a technology that would allow direct phone calls between cities. Nortel was an early pioneer of satellite technologies in the 1960s and helped build Canada's first cellular telephone networks.

Nortel's fortunes exploded with the dawn of the Internet and the introduction of increasingly sophisticated modems and cellular technologies. At its peak, this one company accounted for nearly one-third of the total value of the TSX; the company was worth more than all six big banks combined.

Now the company is being brought to its knees by the prospect of paying $107-million of interest due to its bondholders this week. However, that is not the only financial deadline facing Nortel. On Dec. 15, the company was given a 30-day waiver from Export Development Canada on the government agency's support for up to $750-million of credit. The deadline on that waiver is today.

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