Nortel's Pension Deficit Wildcard

With Nortel (NT) sliding to below $1 the other day, it now has a market cap of less than $500-million. But is it cheap?

The answer is yes and no. On the surface, Nortel seems inexpensive given it has about $10-billion in sales. However, if you scratch beneath the surface, there are several issues to take into consideration.

Perhaps the wildcard is Nortel’s pension deficit, which is now $1.2-billion. With global equity markets down significantly, Nortel’s pension budget could skyrocket. National Bank Financial analyst Kris Thompson suggests a 30% decline in equity value and a 5% increase in bond value could increase Nortel’s pension deficit to $2.3-billion.

Using that pension deficit in our sum-of-the-parts analysis would result in a share value of zero. The stock market could reverse recent losses, which would help to reduce Nortel’s pension deficit.

Although that’s a pretty bleak statement, the pension deficit - as another analyst noted - is only a snapshot at this point in time. If equity markets rebound, Nortel’s pension deficit will go down.

In the near-term, the big question facing Nortel is whether it will have to use any of its cash reserves to deal with a growing pension deficit. Thompson suggests that Nortel may need to inject $391-million of cash in 2009, compared with $331-million in 2008.

Comments

[Red Green:]

More evidence that Mr. Z and the board of directors are stumbling around in the dark. Things go from bad to worse.

2008 Oct 30 10:15 AM