Aastra Unlikely to Bid for Nortel - National Bank Financial

Includes: AATSF, NT
by: FP Trading Desk

If, as current speculation suggests, Nortel Networks Corp. (NT) puts its Enterprise Solutions business up for sale as part of a plan to save itself from bankruptcy, there will likely be no shortage of names lining up with bids, including Avaya (NYSE:AV), Siemens (SI) and even Cisco (NASDAQ:CSCO).

One company unlikely to throw their name in the hat is Aastra Technologies Ltd. (OTC:AATSF), says National Bank Financial analyst Kris Thompson, even though a merger of Aastra and Nortel's enterprise telephony businesses "could be a once in a lifetime opportunity."

Mr. Thompson said in a note to clients:

While we view Aastra's management team as capable to digest a transformational Nortel ET marriage, it would introduce significant integration risks.

Aastra is still completing the integration of the Ericsson ET business, which closed less than one year ago, and is at the same time feeling its way through an uncertain economy. The timing of this potential transaction is likely several quarters too soon for Aastra.

If Aastra were to make a pitch, Mr. Thompson said it could be an accretive deal, assuming it could purchase the Nortel business for c$480-million using C$100-million of debt at 12% interest and c$380-million through an equity issue of C$20 per share.

But adds the analyst:

"This is a tall order since the stock is trading below C$20 per share and the credit markets are tight ($100 mln would be 4x Aastra's trailing operating cash flow and 2x forward). We assume the Nortel business has deteriorated significantly from 2008 levels, which may be overly pessimistic making our purchase price assumption too low."

Believing Aastra is a long shot to make a bid, Mr. Thompson said he is lowering his risked discount rate in his discounted cash flow. As a result, he increased his price target on Aastra from C$20 to C$23 and maintained his "outperform" rating.