Nortel: Would a Breakup Unlock Value?

Merrill Lynch's Tal Liani issued a research report Thursday suggesting Nortel has a theoretical breakup value of $10 - $4.25/share for the wireless business and $5.44 for the rest of the company.

He suggests that long-term valuation creation depends on improving the scale, growth activities and cost structure of Nortel’s wireline and enterprise units. To provide the necessary focus and investment in these areas, Liani said Nortel may need to sell its wireless business, where he believes profits have peaked.

Our 6-yr DCF model yields $2.1B or $4.25/share (0.55 2008 P/S) for Nortel’s wireless business. Nortel’s CDMA business is extremely profitable and the large deployed US base could be leveraged by any potential acquirer into 4G LTE deployments. Spinning out CDMA also minimizes the temptation to price aggressively to stay relevant in LTE. Cashing in on CDMA’s attractiveness before LTE plans accelerate is key, in our view.

Liani maintained a “neutral” rating on NT given that a breakup would require Nortel to “abandon its wireless aspirations and a major shift in strategy,” adding that “the 71% decline in Nortel stock in the past year, though, clearly says status quo is not working, in our opinion.”

The person who was good enough to pass along this report thinks NT is worth $30, and that the price to EV multiples used by Liani - 0.52x EV/share - are “preposterous.”

Comments

[FMR nortel ...:]

The report is reasonably accurate. Nortel under Mike Z & team has lost it's core competency and soul, for lack of a better word.
The outsourcing of tech support to Turkey, devekpoment to India, Turkey and South America have removed a large prtion of the perceived value that Nortel alwys had as a base.
The product lines are in need of faster cycle times to remain relevant and they need to be focused so that the Nortel people know what they are supposed to be driving toward.

2008 Apr 14 02:20 PM

[G10BE:]

I am extremely disappointed with Mike Z's performance. I expected alot more from him. When you have billions in sales, it doesn't take much to show some profit each quarter. A corner shop operator could teach him some basic lessons. There is no excuse whatsoever to show a quarterly losses. Nortel must work from a profit number and up. Make the cuts that are necessary to generate the profit and keep building.

2008 Apr 14 06:17 PM

[Avdude15:]

Mike Z and his management team have allowed their enterprise data business to self-distruct. They completely have failed to address the fundimental problems of their enterprise data business including:
1. Failure to deliver a replacement to the aging 8600 ethernet switch (when did it first ship, around 2001?)
2. Failure to ship a replacment to their Alteon application switches - marketshare has gone from 30% to what 4%? Again, when did they last ship a new box, 2002?
3. Failure to create a sale organization capable of selling data products
4. Failure of their marketing organization to understand the data business
5. Failure to do any online marketing
6. Failure to generate sales leads
7. Failure to nuture a data sales channel - try to find a reseller who sells nortel data gear! Try to find one who has been trained in nortel products!

2008 Apr 21 12:26 AM

[morleyl:]

Working for Nortel, the last few years have been fustrating in terms of how decisions are been made in the current market. There is a lack of clear strategy to win specific markets.

2008 Apr 23 03:45 PM