DBRS Comments on Nortel Networks’ Proposed Sale of UMTS Access Business
Dominion Bond Rating Service (DBRS) believes that today’s announcement from Nortel Networks Limited (Nortel or the Company) that it has entered a non-binding Memorandum of Understanding for the sale of its UMTS access business to Alcatel SA (Alcatel) for $320 million has no credit implications.
DBRS does acknowledge that the sale, if executed, will modestly enhance Nortel’s liquidity and should help the Company increase its focus on business segments where it has dominant market position (Nortel ranked number five in the UMTS market in 2005 with under 10% market share). In addition, the loss of UMTS access revenue, which DBRS believes is a small part of Nortel’s overall revenue, is offset by the low gross margins that Nortel has achieved in its UMTS segment. Although the Company has indicated that expense savings from the transfer of certain personnel to Alcatel could be invested into other businesses, DBRS believes the transaction could result in a small positive impact on cash flow from operations going forward, although free cash flow is still expected to be negative in the near term.
Finally, DBRS notes that the transaction does not alleviate the major credit limitations that DBRS outlined in its recent report on Nortel dated July 6, 2006, which include (1) the ability to grow revenues and keep gross margins above 40%; (2) the resolution of potential contingencies relating to the U.S. Securities and Exchange Commission and Ontario Securities Commission; and (3) the current uncertain telecom environment created by the consolidation of telecom carriers and other telecom suppliers globally. This has also been augmented by the aggressive pricing of newer telecom equipment vendors that has already negatively impacted Nortel’s gross margins and profitability.
The Company has indicated that the transaction is expected to close in the fourth quarter of 2006.
Note:
All figures are in U.S. dollars unless otherwise noted.
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