Nortel Files for Bankruptcy, Victim of Falling Sales (Update5)
By Bob Van Voris and Linda Sandler
Jan. 14 (Bloomberg) -- Nortel Networks Corp.,
North America’s biggest maker of telephone equipment, filed for bankruptcy protection in the U.S., a victim of the global credit crunch and declining sales.
Nortel, based in Toronto, had more than $1 billion in assets and debt, according to a Chapter 11 filing of its U.S. subsidiary today in Wilmington, Delaware. Fourteen affiliates of Nortel’s financing unit are seeking similar protection in Delaware. Five units filed for bankruptcy there under Chapter 15. Nortel said Canadian affiliates also will seek protection.
“It’s the end of a saga,” said Benoit Lalonde, vice president of fixed income at Laurentian Bank Securities, a unit of Canada’s seventh-largest bank. Laurentian doesn’t own Nortel debt. “Nortel is a corpse awaiting burial. I’m sad to see it happen but the tears were shed many months ago.”
Nortel has lost
almost $7 billion since Chief Executive Officer Mike Zafirovski
took over in 2005, leaving him struggling for funds to operate the company. Bank of New York Mellon Corp. was listed as its largest unsecured creditor in its role as trustee on more than $3.8 billion in notes.
Export Development Canada is owed $186.7 million and will provide as much as $30 million in reorganization financing for 30 days.
“If they’re going to go, it’s better to go now,” said Richard Windsor, a global technology specialist at Nomura International Plc in London. “It would imply the company is unable to stabilize the cash flow situation.”
Sales have declined since Nortel sold its high-speed mobile-phone unit to Alcatel for $320 million in 2006. The company got rid of the division to focus on a newer wireless technology called WiMax.
As of Sept. 30, Nortel’s debt amounted to $6.3 billion, including adjustments for operating leases, pension deficits and other items. The company has $1 billion in bonds that come due in 2011. Total liabilities amounted to almost $12 billion.
Nortel Networks said in its chapter 11 filing that it has more than 25,000 creditors and expects to make a distribution to those creditors that are unsecured. Nortel Networks Capital has more than 100 creditors owed $100 million to $500 million, according to court papers. Units of Singapore-based Flextronics International Ltd. are owed more than $50 million.
“The global financial crisis and recession have compounded Nortel’s financial challenges,” the company said in a statement today. The recession “directly impacted” its ability to complete a turnaround begun in late 2005, it said. The company said its day-to-day operations won’t be affected by the filing.
Nortel said it was also seeking protection under Canada’s Companies’ Creditors Arrangement Act. The application is scheduled to be heard today in the Ontario Superior Court of Justice in Toronto, the company said.
The Nortel affiliates that filed under Chapter 15 of the U.S. bankruptcy code did so because the provision helps companies with cross-border operations reorganize partly in the U.S. It allows foreign petitioners to fend off U.S. creditors while reorganizing at home.
Nortel affiliates in Asia, the Caribbean and Latin America, and Nortel’s Government Solutions unit aren’t involved in today’s filings, according to the company.
“This process will allow Nortel to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner.”
Nortel said in the statement that it will ask the courts to restrict trading by investors owning at least 4.75 percent of its common stock or any series of preferred shares of Nortel Networks Limited.
Nortel is represented by lawyers from Cleary Gottlieb Steen & Hamilton in New York and Morris Nichols Arsht & Tunnell of Wilmington. Lazard Freres & Co. LLC is restructuring adviser.
The company paid a $35 million fine in 2007 to settle U.S. Securities and Exchange Commission claims that it defrauded investors by manipulating earnings from 2000 to 2003. The company didn’t admit or deny wrongdoing.
Nortel restated earnings going back to 1999 after probes by regulators in 2004 indicated executives incorrectly booked revenue, inflating sales figures by $3.4 billion.
Zafirovski had sought to revive Nortel’s fortunes by cleaning up the balance sheet
and reducing the workforce by 18 percent since he started. Demand for Nortel’s gear, mainly based on older code division multiple access technology, has waned as customers move to faster systems.
‘Sound Financial Footing’
“Nortel must be put on a sound financial footing once and for all,” Zafirovski said in today’s statement. “These actions are imperative so that Nortel can build on its core strengths.”
Money markets in the U.S. seized up following the Sept. 15 failure of the securities firm Lehman Brothers Holdings Inc. Banks stopped lending as they hoarded cash, pushing the country into a deeper recession. That’s making it more difficult, and more expensive, for companies like Nortel to find new financing.
The company could sell the CDMA unit to raise money, RBC analyst Mark Sue
said in a report in November. The challenge is that too many asset sales may conflict with Nortel’s debt covenants, said Sue, who cut his target
on the stock to $0.
Nortel began as Northern Electric and Manufacturing in 1895, supplying equipment for Canada’s start-up telephone system. The company was the first to produce dial equipment in the country, for a brewery in Montreal, and its switches were used in the first Trans-Canada telephone toll system in 1932, according to Nortel’s Web site.
Nortel’s U.S. stock
reached a split-adjusted high of almost $900 in 2000 as the dot-com boom fueled demand for telephone equipment. Since then, the company lost out to Cisco
and Juniper Networks Inc., whose products enabled telephone companies to transmit phone signals over Internet lines.
The plunge in the shares
prompted a series of lawsuits, with investors accusing Nortel of perpetrating a $3.2 billion accounting fraud that included improperly boosting sales by accelerating the booking of fiber-optic equipment contracts. Nortel fired CEO Frank Dunn
and other executives as a result.
The company agreed in February 2006 to pay $575 million in cash and issue 62.9 million shares to settle the suits, and Nortel’s insurers agreed to pay $243 million. The settlements won approval Dec. 26, 2006, in New York and a month later in Canada.
Last year, Canadian federal police charged Dunn, former Chief Financial Officer Douglas Beatty
and former Controller Michael Gollogly
with fraud for misstating results in 2002 and 2003. They also were charged with accounting fraud by the U.S. Securities and Exchange Commission and the Ontario Securities Commission. Dunn is fighting the charges and suing for wrongful dismissal, according to his counsel, McCarthy Tetrault.
The case is Nortel Networks Capital Corp., U.S. Bankruptcy Court for the District of Delaware (Wilmington).
To contact the reporters on this story: Bob Van Voris
in New York at [email protected]
and; Linda Sandler in New York at [email protected]
Last Updated: January 14, 2009 10:50 EST