How Worrisome is Nortel's Exploration of Bankruptcy Protection?

Nortel (NT) has no plans to file bankruptcy protection but it wants to be prepared just in case it needs to pull the trigger.

According to the Wall St. Journal, Nortel has sought legal advice to explore bankruptcy protection if its restructuring plans don't work. Nortel spokesman Ronald Alepian said there is “no bankruptcy filing imminent”, which is hardly a vote of confidence given the uncertainties surrounding a company with flat sales, declining cash reserves and $4.5-billion of debt.

“We remain focused on carrying out the restructuring we outlined on Nov. 10 to cut costs,” he said, adding that Nortel “should be able to sustain adequate levels of liquidity in the next 12-18 months”.

Not surprisingly, Nortel has also been talking to the Canadian government about potential financial assistance. In the past, Nortel has received financial assistance from Export Development Canada, including master facility agreements that EDC continued to provide while Nortel suffered through its accounting scandal.

According to the WSJ, Nortel’s Metro Ethernet network business has been reviewed by nearly a dozen companies but a deal has yet to materialize because no one has offered “the right price”. Nortel’s exploration of bankruptcy protection may encourage suitors to wait on the sidelines rather than stepping forward with a bid.

GigaOm has a statement from a Nortel spokeswoman. Nortel’s Bo Gowan has a post on Buzzboard about the WSJ story and Nortel’s strategic focus.

Analyst Response

National Bank analyst Kris Thompson suggests that the possibility of Nortel filing for bankruptcy protection is premature right now.

With a $1-billion bond not coming due until July 2011, Thompson expects Nortel will end 2009 with $1.4-billion in cash.

“With no short-term debt obligations and the possibility that Nortel can successfully restructure, we would not expect CCAA as a near-term consideration by the company,” he said in a research note.

If anyone has access to Thompson’s report, it would be great if you wanted to pass it along.

S&P analyst Ari Bensinger said that while Nortel has no major debt obligations until 2011, the “forecast for $1 billion in negative cash flow and $1.5 billion in working capital requirements for 2009, NT has little buffer room to fund operations”.

Sources: National Post, BusinessWeek

The End of the Line?

Here’s the interesting and troubling thing about Nortel apparently seeking advice about bankruptcy protection: with the possibility now firmly in the public domain, how will customers and suppliers react given they were already concerned about Nortel’s viability.

Light Reading nails it by suggesting that “taking legal advice on potential bankruptcy proceedings will surely only dent customer, supplier, and partner confidence in the company’s ability to weather the current economic storm”.

Light Reading suggests “there’s an air of desperation about the company, which is pumping out press releases at an increasing rate and even sending email reminders to journalists pointing out how carriers are still showing faith in the company”.

As for Nortel’s future, the Globe & Mail suggests that a number of investment bankers have put together M&A models using two different sets of assumptions:

Scenario #1 is a purchase of Nortel as a going concern, with the buyer able to make use of Nortel’s enormous tax losses.

Scenario #2, the doomsday model, involved buying Nortel out of creditor protection, shorn of its debts and its pension obligation.

Nortel shares (NT/NYSE) dropped 14 cents, or 22%, to 50 cents in late-morning trading yesterday. The company’s market cap is now $248.7-million. (Note: The share hit a record low of 37 cents before closing at 40 cents.)

Comments

[law1985:]

Management and the BOD are acting responsibly by investigating every alternative. The status quo has been rejected and the reasonable alternative is restructuring with creditor protection as the fall back position, if they are unable to realize significant value from asset sales. The worst case scenario is already built into the share price.

I am not sure that a potential interested acquiring party can afford to wait to buy assets from a forced liquidation. For instance, the US infrastructure spending stimulus, which includes broadband, will be implemented in 2009 and 2010, in order to participate a supplier needs to be ready yesterday.

I am not a fan of Mike Z....but he is a competent financial engineer. He needs to do what IBM did in the early 90s despite screaming employees, demanding pensioners and furious shareholders. Notice how quiet the debt holders are...

Management is also providing a lot of information. Preannouncements and financial details are forthcoming in a timely fashion. Furthermore, there is nothing wrong with press releases.

2008 Dec 11 11:47 AM