Last week, Nortel Networks Co. (NT) sunk to a new low -- literally -- when its stock closed one day at 99 cents per share, ushering the global telecom giant into the realm of penny stocks that is notoriously hard to climb out of. And that wasn't even the worst news. National Bank Financial analyst Kris Thompson said that even at 99 cents, the stock was too expensive. He slashed his target price to 50 cents from $2.75 previously, and said he could no longer see any positive scenarios for investors.
"Our initial thesis was to reduce holdings on positive news events," Thompson wrote in an Oct. 28 research report, citing his earlier expectation that news of a large asset sale or a major customer win could boost Nortel shares, at least temporarily. But he added that "given the unprecedented change in the economic outlook, we'd exit any remaining investments in Nortel."
Pretty strong words from an analyst who as recently as early October had faith that Nortel was successfully restructuring. And Thompson is not alone with his dire outlook. The discussion these days around Nortel is increasingly taking a "final days" tone. Some analysts say the company's planned sale of its Metro Ethernet Networks business, regarded by some as the company's crown jewel, will not be the last asset Nortel has to part with just to remain liquid. Nortel has been especially hard hit by the soft stock market, which has added to its $1 billion-plus pension deficit.
This story equates the company's decision to put its Metro Ethernet business up for sale as "outright capitulation" and says that "the chorus of voices suggesting Nortel will ultimately be dismantled is growing louder."
One theory is that after Nortel disposes of its Metro Ethernet business, it will shift its focus to selling its wireless assets as it scrambles to raise cash to pay off debt and meet its mounting pension obligations.
"They have to become a lot smaller," said one analyst who asked not to be named. He argued that if his prediction for not one, but two, major asset sales turned out to be true, the surviving business focusing on enterprise and voice-over-IP assets would be a shell of the former Nortel.
And even that could turn out to be a best-case scenario. Nortel, of course, has not yet found a buyer for its Metro Ethernet business. One source says that talks with one interested buyer have fallen through. Although analysts say the business is a relatively attractive property that should attract other interested buyers, they question how much Nortel would get for the unit in today's tough deal market.
"We lack confidence on timing and value of the potential sale," UBS Investment Research analyst Nikos Theodosopoulos wrote in a research report.
Despite this uncertainty, one theory circulating is that Nortel is determined to have its dismantling underway before the end of the year and could have some news on this front by Nov. 10, when it reports quarterly results. -Andrea Orr
See Sept. 25 post on Nortel's effort to sell its Metro Ethernet Networks business from Tech Confidential
See Nov. 1 story on Nortel from Canadian Business Online
