For more on Nortel’s AGM, here’s my story in today’s National Post. It is interesting that CEO Mike Zafirovski’s strong interest in boosting the stock price through improved operations may have something to do with the fact he’s got millions of stock options, including a new tranche with a $2.12 strike price. So, if the stock doubles or triples on the basis of better profits over the next few quarters, it’s likely Mike Z. will do much better financial than selling the company for a 20% to 30% premium (40 to 60 cents at current levels).
Archive for June, 2006
It looks like Nortel had to pay through the nose to complete its $2-billion debt offering. It plans to issue three different notes: $450 million due in 2016 paying 10.75% a year, $550 million due in 2013 paying 10.125%, and $1 billion of floating rate notes due in 2011, paying three-month LIBOR plus 4.25%. Bottom line: the deal reflects higher long-term interest rates and a “sweetner” Nortel had to offer investors to buy into the offering.
My column in today’s National Post looks at how investors and analysts want more details about Nortel CEO Mike Zafirovski’s strategic vision. Meanwhile, Light Reading wonders if Nortel has become the “Old Maid in Telecom M&A” after watching from the sidelines while rivals such as Alcatel, Lucent, Siemens and Nokia hook up. ““Nortel’s run out of partners, and this is going to force them to do what they should have all along, and that’s to become smaller and more focused,” said Tim Daubenspeck, an analyst with Pacific Crest Securities Inc. “Strangely enough, that might mean becoming more of an enterprise/VOIP player.”
For anyone not able to make the Nortel AGM today (Thursday) in Toronto, check out the Webcast. Anyone want to bet on how long this year’s AGM lasts? Hopefully, it will take less time than last year’s six-hour plus marathon.
Update: So far, turnout at the AGM seems fairly light, which would suggests the AGM may be a quiet affair. Then again, all you need is a few “enthusiastic” shareholders to get things exciting. Zafirovski’s presentation, which saw him take off his jacket and walk to the front of the stage, was what you would have expected: straightforward, focused, bullish. The Q&A session is typically AGM material: a few good questions, some venting. There continues to be much angst/disappointment from shareholders about how the stock price has dropped from a high of C$124.50 in July 2001 to less than C$3 today – demonstrating many people still can’t believe so much of their money has evaporated.
Quote of the AGM: I am personally not interested in selling or merging Nortel with somebody else. We may have to do it at some point if we are not successful” – Mike Z.
Nortel CEO Mike Zafirovski has done a nice job giving the company some stability but the natives (aka Wall St. and Bay St. analysts) are getting restless. A good example is Scotia Capital analyst Gus Papageorgiou who applauded yesterday’s pension plan changes and job reductions but clearly wants more. In a research report, he said “improving operating efficiencies is a positive, companies do not succeed by operations alone. What we are looking for from Nortel’s senior management team is a clear vision of what the company will be, particularly in light of recent M&A activity in the sector. Operational excellence is crucial in executing on a company’s strategy, but with no set strategic direction, improving execution abilities can only go so far.” Who knows, maybe he’ll get some satisfaction at tomorrow’s AGM.
Well, this is no surprise: Nortel is slashing 1,100 jobs, including 350 middle managers – a move that will reduce annual operating costs by $100-million by 2007 and $175-million by 2008. You had to know CEO Mike Zafirovski had something up his sleeve when he’s talking about better times ahead by 2008. Do not be surprised if there are even more job cuts are announced as Nortel’s strategic plans are finalized. Update: Nortel is also changing its pension plan structure to save about $100-million a year. The adoption of a defined contribution plan has become pretty standard fare within the technology industry, which begs the question why it took Nortel so long to climb on the bandwagon. One thing disgruntled Nortel employees may find difficult to accept is while their pension benefits are changing, Zafirovski received a US$500,000 "special pension benefit" when he was hired (a guaranteed payment on top of his normal pension benefits).
According to Associated Press, UBS said it believes consolidation within the wireless equipment market may have ended now that three companies (Ericsson, Lucent/Alcatel and Nokia/Siemens) control 70% of the market. UBS does, however, expect M&A in the wireline and enterprise sector with Siemens’ enterprise business on the market. UBS said Motorola is not likely to make large-scale acquisitions, although smaller deals are possible.
There’s lot of buzz about Microsoft’s move into the IP telephony market – a move that has people strangely excited despite the fact the market is already pretty crowded with players such as Mitel and Cisco. Nevertheless, Nortel has grabbed some of the spotlight because the Nortel-LG joint venture will work with Microsoft to develop and sell a new IP phone, which is being aimed small and medium sized companies.
For all the speculation about Nortel being a buyer, there are some people who believe the company could be bought as the telecom equipment market leading players look to consolidate. India’s Financial Express quotes Charter Equity Research analyst Edward Snyder that “If you look at financials, Nortel is the No.1 target” for a takeover. The story also raises the idea that Alcatel was in talks to buy Nortel before it decided to enter into a marriage with Lucent. If Nortel CEO Mike Zafirovski has his way, Nortel won’t be acquired before his restructuring plan has more time to work and/or revive the stock price, which has dropped more than 30% since Mike Z. came on board last November. There is plenty of speculation a deal involving Nortel could be a win-win for Mike Z. because he could become CEO of a JV or if Nortel was acquired by Cisco, for example, he could become the successor to the existing CEO.
Update: Local Tech Wire has a story looking at Nortel’s M&A prospects. It cites the Toronto Star, which suggests a combination of Nortel, Huawei and Motorola would create the world’s third-largest equipment supplier with 19% market share. “Ego counts, of course, and Nortel CEO Mike Zafirovski left Motorola after being passed over for the top job,” the Stars wrote. “But a deal could be done if Zafirovski and the turnaround CEO who got his Motorola job, Ed Zander, could work out a not-unusual co-CEO arrangement. And the Chinese, eager to tap Nortel’s wireless technology, are equally sanguine about upheaval in the developing countries where they seek oil and the Toronto suburb where financial restatements are a quarterly occurrence.”
It’s just a thought and perhaps it comes from way out in left field (apologies for the baseball analogies) but what if Nortel was sold in pieces rather than trying to get bigger through an acquisition or joint venture? So speculates Orion Securities analyst Duncan Stewart, who suggests a sum-of-the-parts analysis indicates "Nortel disassembled may be worth significantly more than its current market cap". As a loyal Canadian, Stewart thinks it would be great if Nortel could survive and thrive. He ponders why Nortel couldn’t become a "profitable and happy equipment manufacturer, although than some others" if it CEO Mike Zafirovski keeps working away on his cost-cutting program.
SmartMoney.com has a story looking at Nortel's prospects in the wake of the Nokia-Siemens joint venture. There's not a lot you haven't read elsewhere but one eye-catching paragraph is an assertion the only way Nortel can compete with the "Holy Trinity" of Alcatel/Lucent, Siemens/Nokia and Ericsson is to "miraculously grow its company to the same gargantuan scale as an Ericsson or Alcatel-Lucent through a merger or partnership." The story quotes Morningstar analyst John Slack that despite $10-billion in revenue, Nortel "doesn't have the scale to go head to head with these guys going forward. After all, this is a cash-intensive industry that is constantly evolving, and Nortel needs the sales to fund its R&D efforts or else it will fall further behind the pack". The sentiment of Slack's comments are interesting because it suggests the investment community could give Nortel and CEO Mike Zafirovski little time to make a move. The question is how quickly can Nortel do something at a time when it's just finishing a strategic review and poised to start a cost-cutting program? The reality is Nortel may have no choice but to move faster than it wants. Maybe Mike Z. has a strategic vision that includes acquisitions, including Siemens' enterprise business. All this scuttlebutt should make next week's AGM much more interesting.
Nortel has hired John Roese as chief technology officer – a year after Gary Kunis stepped down along side COO Gary Daichendt. Nortel poached Roese away from Broadcom where he had been CTO for less than six months. No doubt, Broadcom can’t be too pleased with Roese’s decision but it looks like another solid senior management addition for Nortel. With the team in place, Nortel CEO Mike Zafirovski now needs to focus on nailing down his strategic plan and then executing on it – a big, big, big challenge.
Amid scuttlebutt of a deal between Motorola and Nortel, Merrilly Lynch suggests Motorola could acquire Tellabs Inc. for cash. "We believe that Motorola is looking to acquire a wireline vendor, and the profile highlighted by management seems to fit Tellabs the most," the report said. "Management has not executed on its stated plan to buy back $1-billion of debt, suggesting a deal may be imminent." Merrill Lynch said they recently met with Motorola CEO Ed Zander and Executive VP Ron Garriques, who talked of their growing handset portfolio, including the debut in the next few months of the Razr 2 mobile phone, the Canary.
According to Bloomberg, Nortel is expected to offer the highest yields in 15 years to convince enough investors to purchase $2 billion of junk bonds this month. The yield on Nortel's 6.875% due in 2023 has risen about 100 basis points to 8.3% since May. "A lot of deals aren't doing well out of the blocks," said Timothy Cronin, a fixed-income analyst at John Hancock Advisers in Boston, told Bloomberg. "There's fear over the strength of the economy and whether the consumer is going to hang around." Nortel is expected to sell its bonds due in 2011, 2013 and 2016 next week. Nortel is selling the bonds to repay money drawn from a $1.3 billion, one-year credit line, replenish cash used for $150 million of bonds that matured this month and fund a $580 million payment related to a shareholder lawsuit.