This week, after months of speculation, Avaya announced its long awaited financial restructuring plans. The company has entered into a Restructuring Support Agreement (RSA) with 90% of the Company’s secured lenders. The company's press release adds, "To efficiently implement the Financial Restructuring, Avaya and all of its U.S. subsidiaries today filed voluntary prepackaged Chapter 11 cases in the U.S. Bankruptcy Court for the Southern District of Texas."
Once the restructuring is complete, Avaya’s total debt will be reduced by 75% from $3.4 billion to $800 million, and that debt isn’t due until 2028. The restructuring will also increase the company’s cash on hand to approximately $600M, providing substantial liquidity for Avaya moving forward. Because Avaya has already secured agreement among more than 90% of its secured creditors, the restructuring is expected to be completed in only two to three months. This will result in Avaya having net debt leverage of less than 1x revenue, which is actually better than many of its publicly traded peers.
As part of the process, Avaya has been delisted from the New York Stock Exchange; post-restructuring, it will emerge as a private company. The company is better off being private while it continues to transform its products, as it won’t be under the microscope of Wall Street. Also, Avaya will have a completely revamped board of directors with Masarek being the only holdover from the previous board. This will let Avaya bring in board members that have the necessary skills to guide the company through its next phase of life.
The lenders are made whole in this deal as they get percent stake in the new company equivalent to the percent of debt they held. If they owned 20% of the previous debt, they would now own 20% of Avaya. Their payback will come when Avaya goes through a financial transaction such as an IPO or they are acquired.
While this is a “win” for the company, lenders, customers, and channel, it certainly has downside to shareholders, which includes many employees that had invested in the stock purchase plan or were awarded options and/or restricted stock units (RSUs). For employees, it’s good news they still have a job, but many of them will see significant savings disappear. Many of them will likely never be made whole but, if Masarek executes as he did at Vonage, much of that money could be made back in bonuses and future stock grants -- but those possibilities are a long way from here.
In the past, I’ve characterized Avaya as a high income-earning individual that has two mortgages, a boat payment and two ex-spouses they are paying alimony to. While there is a lot of cash coming in, the outflow of cash was too high to let the company do anything meaningful. The re-capitalization should allow Avaya to move forward unencumbered by the boat anchor of debt, which ultimately was the right thing to do. Many industry watchers had speculated that bankruptcy would be the end of Avaya, but that isn’t the case. Its install base has always been its strength and most of that will stay in place. Now, without the debt, it can execute on the revamped roadmap and create consistent growth.
Upon appointing CEO Alan Masarek just six months ago, the company started a reset to become a more agile, innovative, and efficient organization able to provide greater value for customers. This restructuring announcement to address the capital structure signals that Avaya is nearing the successful culmination of their aggressive five-part plan to transform the company. They have already made significant progress to redefine and focus their product and go-to-market strategy to meet customer needs, simplify their reporting and organizational structure, revitalize the culture, and right size their cost structure.
The restructuring should be considered good news for customers and channel partners as well -- Avaya's financial picture is now resolved, and the company can execute on its “Innovation without Disruption” vision without the encumbrance of its former financial burdens. Leading up to the announcement, there was some speculation that Avaya customers would flee the company -- but that wasn’t the case when Avaya went through bankruptcy before. I talked with many Avaya customers then, and the account teams were very active in ensuring customer needs were being met. I expect the same this go around. It’s important to understand that the RSA is about financial restructuring and doesn’t really impact product, service or anything customer or channel facing.
The other big news from this is the revamping and expansion of the deal with RingCentral. The initial premise was that Avaya would be flipping its base to RingCentral, but Avaya actually used Avaya Cloud Office (ACO) to win new customers as an agent. This meant the deal was initially written as a RingCentral contract and Avaya was paid a one-time commission that was deducted from the initial $500M investment RingCentral made. The new deal will still have Avaya continue with the current agency model but will also act as a wholesale distributor, where they will own the customer and will share in the lifetime value of the deal. If the customer renews and buys more, Avaya gets paid. This is much more equitable and incents Avaya to stay in front of the customer post sale.
Looking ahead, there is a tremendous amount of room for innovation in Avaya’s base. Much of their install base are large financial services firms, governments, hospitals and others that treat contact center and calling as a mission critical service. Avaya’s Innovation without Disruption isn’t just a marketing term. It lets customers keep their existing assets and then bring in many of the digital services via the cloud, which minimizes risk, helps with data sovereignty, and ensures better security and compliance.