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Avaya "Hell or High Water Clause" Can be Costly
The bankruptcy auction for Nortel ES is coming to a close, but it is not the end of the process. It may not even be the beginning of the end, but the end of the beginning (to paraphrase Winston Churchill), because it is not a given that the bidder with the highest final bid will immediately be declared the winner and take control of the company.The initial bid winner may, in fact, never complete the transaction after months of negotiations. Matlin-Patterson's filing with the bankruptcy court claimed that a "hell or high water" clause requiring Avaya to do everything necessary to complete the transaction could take months, and even then final approval for the transaction may not be given. In the meantime Nortel must continue providing working capital for the business unit, and debtors receive nothing in return.
Mark Evans writes about this in his recent All About Nortel post about Siemens Enterprise Communications (SEN) Group possible last minute bid for Nortel ES. It's possible that six months from now Nortel ES may still be up for sale yet again if Avaya is unable to receive an anti-trust sign-off from the Department of Justice (DOJ). The wheels of Justice sometimes move slowly, if they move at all.
Evans' AAN post, however, does not state how much a delay could cost Nortel and its creditors. I estimate that the minimum working capital to keep Nortel ES operation running will be at least $400 million dollars for about six months merely to pay salaries, wages and associated overhead for its employees. Additional monies will be needed for a variety of non-employee operations, such as R&D, General Sales and Administration (GSA), and manufacturing. Something else not frequently mentioned in discussing the cost to Avaya in addition to the bid price is the working capital it must provide to support Nortel ES before cash comes in. The bid transaction does not include Nortel ES accounts receivable and other earned monies (they stay with the shrinking Nortel Inc.).
It will cost Avaya hundreds of millions of dollars to keep Nortel ES operations afloat until generated revenues are actually in Avaya coffers, not to mention additional acquisition/merger costs. Another thing to factor in is that Nortel ES operation losses, not profits, are highly likely the first few months, when sales are likely to decline in the state of chaos and confusion about the future viability of its products. This is a lot of money for Silver Lake and TPG, especially when the former private equity company is shelling out more than a billion dollars for its Skype acquisition from EBay. A billion here and a billion there starts adding up, especially in tough economic times.