While Nortel may publicly proclaim it’s part of a strategic focus on enterprise/carrier VoIP and services/software, another explanation is Nortel needs cash to pay down debt. In particular, it has US$1-billion of Floating Rate Senior Notes due 2011. According to Nortel’s last 10-K, the had an interest rate of 9.4925% per annum as of December 31, 2007.
Assuming Nortel gets $1-billion to $2-billion for MEN, some or all of the proceeds could be used to redeem the 2011 notes. That would significantly reduce Nortel’s debt load and improve profitability by slashing its interest rate payments.
Another scenario is Nortel is already buying back the 2011 notes, which apparently trade at a deep discount. Let’s say, for example, it wanted to redeem $500-million of notes. At 70 cents on the dollar, this would cost $350-million.
You have (correctly) outlined a viable strategy for Nortel, however, this is yet another turnaround within an existing turnaround. Given that the management teams of NT’s competitors (Cisco, IBM, MSFT, etc.) have solid and well-established domain expertise in the enterprise market (and not just legacy equipment) how do you rate the ability of NT’s management team to execute. Comments, pls…--bb
Tongue.In.Cheek
My opinion is that it really doesn't matter what type of business is being run as two types of senior executives are required. You need a Business Executive that manages P&L etc. and a Customer Deliverables Executive that manages sales, marketing and product strategy etc. I think that Nortel has some good Business Executives in select areas and some good Customer Deliverables Executives in others but not a consistent team. I like Flaherty, Nelson & Roese to deliver some of those specific items. However, as you and I have discussed here a couple of weeks ago, Nortel could use a strong Chief Software Architect role to drive new customer platforms.
exnt
You like Flaherty, Nelson, and Roese?? Tell me you are joking!
Tongue.In.Cheek
There are a couple of things I would like to know but don't know where to find the data.
1) What is the 5-year revenue and CAGR values for MEN?
2) What is the 5-year revenue and CAGR values for VoIP and Unified Communications delivered by both Enterprise and Carrier Hosted models?
What we also don't know is if a MEN disposition would include a portion of the existing debt or if there would be an increase in the cash value of the transaction directly tied to the business unit debt value.
No doubt some of the proceeds will go towards restructuring costs. After that I hope Nortel makes the decision to invest in new software interests that are directly relevant to their UC direction such as Web.Alive. If they want to participate in the UC market, then they will need more UC Applications that customers will want to deploy.
protosphere
Since they want to divest Metro Ethernet to pay for more layoffs, perhaps reducing personnel costs is more pressing than reducing increased interest payments. Reducing either has its price with lower revenues.
A Post-MEN Plan: Pay Down Debt
One of the big questions surrounding Nortel’s plan to sell its fast-growing metro Ethernet network business is: why? Why kick out MEN when it’s one of your few growth assets?
While Nortel may publicly proclaim it’s part of a strategic focus on enterprise/carrier VoIP and services/software, another explanation is Nortel needs cash to pay down debt. In particular, it has US$1-billion of Floating Rate Senior Notes due 2011. According to Nortel’s last 10-K, the had an interest rate of 9.4925% per annum as of December 31, 2007.
Assuming Nortel gets $1-billion to $2-billion for MEN, some or all of the proceeds could be used to redeem the 2011 notes. That would significantly reduce Nortel’s debt load and improve profitability by slashing its interest rate payments.
Another scenario is Nortel is already buying back the 2011 notes, which apparently trade at a deep discount. Let’s say, for example, it wanted to redeem $500-million of notes. At 70 cents on the dollar, this would cost $350-million.
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