Nortel News: Huawei Bids for MEN, Analyst Downgrade, Bankruptcy Might Make Sense

Huawei Bids for MEN

Amid news that there are three “serious” bids for Nortel’s (NT) Metro Ethernet Network business, China’s Huawei Technologies has apparently made an offer.

Huawei’s interest in MEN hinges on its strategic desire to get a foothold in North America. The fast-growing telecom supplier made an attempt to move into the market by bidding for 3Com Corp. but that effort failed.

The question facing Huawei, which plans to open an office in Ottawa, is whether it will be allowed to acquire a North American supplier given concerns about security.

For more on Huawei’s strategic ambitions, check out ChinaStakes.com.

TD Securities Analyst Downgrades, Suspends Price Target

Citing tighter capital spending by carriers and concern about Nortel’s future among enterprise customers, TD Securities analyst Chris Umiastowski has downgraded Nortel to a “reduce” and suspended his stock price target.

The decision to downgrade NT to a “reduce”, he said, is based on the expectation that Nortel will have sales materially below consensus, and force Nortel into asset sales sooner rather than later.

The suspension of the target price is based on the belief Nortel’s shares are “trading more like a call option on the successful outcome of a business transformation along with some asset sales. This situation is incredibly hard to value, and the stock price is naturally going to be highly volatile”.

Umiastowski said he believes more restructuring is necessary, and that $900-million in cuts are needed to give Nortel a “realistic shot” at having 10% operating margins.

“Unfortunately, this will require cash, and would put the company closer to being in a cash crunch. It seems the only way out is to sell assets, which Nortel is currently trying to do (e.g. MEN business is for sale),” he wrote in a research report. “We believe that Nortel must either succeed in selling assets at reasonable prices, or face increasing risk of inevitable bankruptcy.”

Umiastowski does not believe Nortel will file for bankruptcy protectionin 2009 but he’s concerned the company may not be able to sell its metro Ethernet business or other assets given the current market conditions.

Bankruptcy Might Make Sense

UBS analyst Nikos Theodosopoulos believes it might make sense for Nortel to seek bankruptcy protection sooner rather than later.

In a research report, “Nortel: January bankruptcy filing?”, Theodosopoulos said declaring bankruptcy in January “may make sense to maximize franchise value”, and allow the company to avoid an interest payment of $100-million to $120-million due on Jan. 15.

“We believe a likely challenging 4Q08, weakening 09 outlook and tightening DIP financing may cause Nortel to withhold its interest payment and possibly pursue an early bankruptcy,” he says.

Source: NetworkWorld