Nortel at Risk of Delisting

Barring a sudden pickup in the economy that might produce a rush of buyers for its telecom gear, Nortel Networks Corp. (NT) is now at risk of a stock delisting and insolvency, say several industry analysts who are watching the share price collapse and crunching the cash burn numbers.

The reality that the company's latest restructuring probably won't save it appeared to set in with the last group of faithful shareholders on Wednesday, as Nortel shares plunged deeper into penny stock territory, losing almost 25% of their value to sell at around 65 cents per share by late afternoon trade.

 

Analysts don't seem too concerned that the shares, which have closed below $1 all week, now risk being delisted if the trend continues, since they say few institutional investors own the stock anyway. But it's a fate Nortel has been trying to avoid for some time and must have thought it had prevented for good two years ago when it enacted a 10-for-1 reverse split.

 

More serious is Nortel's dwindling cash reserve, which it needs just to run its day-to-day operations. Analysts are increasingly pinning their predictions for the company on on some figures Nortel management offered up during a conference call Monday. It said it needs $1.5 billion in cash to run the business and expects to have $2.4 billion at year end. Kris Thompson, an analyst with National Bank Financial in Toronto estimates the company will burn $901 million, or maybe more, in 2009.  Do the math.

 

"It won't take much of a revenue or profitability shortfall to burn significantly more cash," he writes in a research report. "In our view, Nortel would be hard pressed to access new capital in today's market." In Thompson's view, the company's stock is too expensive, even considering its potential breakup value, which he says would be eroded by pension obligations. He has a 50 cents target on the stock.

 

Insolvency, in other words, is becoming a very real risk. One mitigating factor might be a short-term moratorium on Nortel's ballooning pension deficit payments, which Thompson said could save it $350 million or more in annual cash burn. Then again, the company also risks having its cash burn go in the opposite direction. Even after reducing guidance for its fourth quarter, the company may be too optimistic and may have to issue another warning, Thompson believes. -Andrea Orr

 

See Nov. 10 post on Nortel's latest restructuring from Tech Confidential