Nortel may go bankrupt

Nortel may go bankrupt

By Steve Ladurantaye

Warning that bankruptcy is a "distinct possibility" for Nortel Networks Corp., RBC Dominion Securities Inc. slashed its share-price target for the ailing telecommunications company to $0.

"The world moved on while Nortel was stuck in restructuring mode, and the lack of financial flexibility means Nortel has to rely on asset sales to fund future operations," analyst Mark Sue wrote in a note to clients.

Nortel responded in a statement after Mr. Sue's report was issued, saying: "Cost reduction and cash preservation are priorities - both to stabilize our financial footing as well as to provide funds for growth investments. We are moving forward in a determined fashion, and have carved a clear plan forward to strengthen our financial footing."

Mr. Sue had left his "underperform" rating on the company's shares in place, but cut his estimate back from $1.50. The shares rose yesterday on the Toronto Stock Exchange, giving the company a market capitalization of $447-million. During the high-tech boom, its market cap was closer to $370-billion.

To deal with continued losses, the company has placed its metro ethernet networks division up for sale and announced that it would lay off another 1,300 employees, including marketing and technology executives. It also suspended dividend payments on preferred shares, scaled back research and development, cancelled pay increases and reduced general expenses.

The Toronto-based company posted a $3.5-billion (U.S.) loss for the third quarter earlier this week, and said revenue fell 14 per cent to $2.32-billion as economic conditions deteriorated faster than expected.

"Our cash-flow analysis points to an increasingly challenging outlook," Mr. Sue said.

He said the company couldn't have picked a worse time to sell its metro ethernet business, with competitors likely to underbid because of Nortel's weakening position.

"With metro ethernet fetching only a small fraction of its intended price, Nortel may in turn decide to sell its CDMA [wireless standard] assets as well," Mr. Sue said. "We're not sure Nortel can sell more than half of the company without triggering its asset-sale debt covenants."

Analysts expect Nortel to end the year with about $2.4-billion in cash to fund operations, and suggest the company could burn through another $800-million in 2009.

"Without government intervention or major financial sponsors, Nortel may run of out cash before its $1-billion, 2011 bonds mature," Mr. Sue said. "Our price target of $0 represents our belief that bankruptcy is a distinct possibility and common shareholders are last in line."

Although eight analysts who follow the company rate the common shares a "sell," not everyone has such a bleak outlook, according to Bloomberg. Four analysts still rate them a "buy," and 11 a "hold." The 23 analysts have an average 12-month price target of $2.45.

At $5 a share, Barry Richards of Paradigm Capital has one of the highest price targets. He argues that the company is in "a lot better shape than the market is prepared to admit.

"It's either worth $0 or it's worth a lot more, and I think it's worth more," he said. "They have invested $20-billion in research in the last 10 years. I know people have been disappointed for the better part of 10 years, but there's better value here than the stock is implying."