MatlinPatterson Global Advisors, a New York-based private equity firm, confirmed on Monday that it plans to put forward a comprehensive proposal to reorganize Nortel. They are a major bondholder and Nortel creditor, to the tune of $400 million (about 10% of the outstanding bonds). They are working hard to stop the proposed sale to Nokia Siemens of Nortel's most valuable wireless communications divisions and allow Nortel to reorganize its key businesses and emerge from bankruptcy. According to the Financial Times, MatlinPatterson was trying to put together a consortium of investors to fund a recapitalization of Toronto-based Nortel. Any acquisition bid would require a debt-for-equity swap. The financial firm is up against a July 24 deadline, the date set by the bankruptcy court to consider Nokia Siemens' $650 million "stalking horse" bid It has been reported that MatlinPatterson's objective is to present an alternative to the sale of Nortel business assets that not only exceeds the current Nokia Siemens bid in terms of value, but one that also provides a superior outcome for the company and its stakeholders.If MatlinPatterson is successful in its endeavor I do not think that they would keep Nortel's Enterprise Solution (ES) business unit as part of the reorganized company, but sell it off to prospective bidders, such as Avaya and Siemens Enterprise Communications, for about $500 million to recoup some of its upfront investment. This is an extreme situation where the dying telecommunications supplier's individual businesses are worth far more than the whole organization loaded with debt. The ES business has undergone a significant decline in revenues during the past year and its market value has shrunk considerably. There is currently little synergy between Nortel's enterprise and carrier businesses and it doesn't make sense to keep ES in the face of very tough competition (and getting even tougher with Microsoft looking to replace installed telephony systems with the very same OCS solution Nortel has been pushing the past two years as part of the two company's ICA venture); a flood of major dealers signing up with competitors; lost customer confidence; and especially the gutting of its product development and marketing operations during the past few years.
During the past few years several of the leading global telecommunications system suppliers have shed their enterprise communications business units: Lucent Technologies spun-off Avaya as an independent company; Ericsson sold its enterprise operations to Aastra Technologies; and Siemens handed off controlling interest in its enterprise communications group to Gores Group. I personally think that Alcatel-Lucent is a likely candidate to sell its Enterprise Product and Services Group sometime in the near future, because the company's future, like Ericsson's, lies strongly in the carrier market, especially wireless services. Alcatel-Lucent is not likely to make sufficient inroads into the North American enterprise communications market anytime soon and the potential threat of Microsoft will weaken its global presence during the next few years.
There are several future scenarios for Nortel ES, but the most likely is for it to merge with an existing competitor, because there are too many negatives for it to remain as part of a reorganized Nortel owned by a private equity firm who is focused on business assets with an upside future for resale or an IPO a few years down the road for a nice profit. (The idea of resale was the explanation given by Silver Lake/TPG for its purchase of Avaya). MatlinPatterson is not different in its Nortel interest, but with the value of enterprise communications businesses in decline (see my earlier post "What is Nortel Enterprise Solutions' Market Value?," now is the time to sell.
