Merrill: Break-up of NT could unlock >35% value

By Mark Evans | Published: April 10, 2008

Merrill Lynch Tal Liani issued a research report today 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 “neutral” rating on NT given 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.”

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  • http://www.nortelenterprise.com Name Nortel Enterprise

    Splitting Nortel into 4 separate individual companies is inevitable, Enterprise (M1 CS1K PBX's), Carrier Wireline ( DMS/CS2K core switching for wirleline/wireless/instant messaging IMS), Carrier Wireless and Data/Optical (Bay Networks :D ) should all be stand alone companies. The sooner this happens, the sooner the separated companies will start focusing and investing in their core competencies, instead of subsidizing each other..

  • memo

    The US financial system needs a top-down renovation including analysts.

    mark sue reduces price target after the share price drops, issues sell recomendation with a price target of 7 dolars showing 15% increase. now the stock has passed that level and i expect mark sue to issue buy again, which is not good for Nortel Investors.

    analysts were bullish about Enron right before its bankruptcy,

    credit rating agencies said ok for sub-prime bonds prior to sub-prime market crisis.

    bla bla bla

    now, merrill lynch says 10 dolar breakup value and i say to them were you sleeping one year ago when the stock was trading at 25 dolars.

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  • http://ext.com ex-nt

    Finally, an analyst with some brains!!

  • Onlooker

    I think the more realistic scenario is that all of Nortel's competitors value's will fall by 20-35%. Nortel is already fairly valued for the global depression. In my opinion, others like Cisco, Juniper etc will have to follow.

  • Onlooker

    memo has a great point about Enron. Many of the same accounting and off book techniques that were used at Enron before its collapse are now being used by the entire banking industry and even the Federal Reserve. Eventually all these losses will have to be marked to market. This is why we are in the curent global banking crisis.

    Analysts are deaf, dumb and blind when it comes to trying to predict the future when so much of it depends on the macroeconomy and not what happens in some little corner of the universe. GE is the greatest example of a single stock as a macro indicator and from the looks of today's news from them, this will be a prolonged slowdown lasting into 2009.

  • http://ext.com ex-nt

    Finally, an analyst with some brains!!

  • Onlooker

    I think the more realistic scenario is that all of Nortel's competitors value's will fall by 20-35%. Nortel is already fairly valued for the global depression. In my opinion, others like Cisco, Juniper etc will have to follow.

  • Onlooker

    memo has a great point about Enron. Many of the same accounting and off book techniques that were used at Enron before its collapse are now being used by the entire banking industry and even the Federal Reserve. Eventually all these losses will have to be marked to market. This is why we are in the curent global banking crisis.

    Analysts are deaf, dumb and blind when it comes to trying to predict the future when so much of it depends on the macroeconomy and not what happens in some little corner of the universe. GE is the greatest example of a single stock as a macro indicator and from the looks of today's news from them, this will be a prolonged slowdown lasting into 2009.

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