Updated with confirmation, comment from Nortel: In a sign of just how deep the troubles of the troubled telecommunications industry currently run, The Globe and Mail is reporting — and Nortel Networks has now confirmed — that the equipment maker plans to file for bankruptcy,
perhaps as soon as today. The Canadian company has $4.5 billion in debt, and faces declining sales for its gear as operators pause network deployments. To further its woes, Nortel is having a tough time selling off its metro Ethernet division, a move aimed at raising more cash. Nortel could not be reached for comment, but Bankruptcy rumors have dogged the company in the last few weeks. Tomorrow it has to make a $107 million interest payment on its debt — something that analysts know it can do now, but are worried about down the road. It’s odd that a company with cash on hand would file for bankruptcy, but Nortel could already have expressions of interest from potential buyers who could buy the company without its debt burden after a trip through the bankruptcy courts. A company spokesperson, via email, said simply that, “After full consideration of all other alternatives, and in light of the current adverse economic environment, Nortel concluded this step is in the best long-term interests of Nortel and its stakeholders.”
The Globe and Mail proposes a bleaker scenario, speculating the Nortel may choose bankruptcy now because it’s concerned about its ability to raise financing to get it through the bankruptcy process if it waits until its coffers run dry. In that case, an earlier bankruptcy could make Nortel a better target for a buyer interested in keeping employees and healthy product lines.
“Nortel must be put on a sound financial footing once and for all,” said Nortel President and CEO Mike Zafirovski said in the press release announcing the move. Of course, Nortel has been trying to turn around since the telecom bubble burst:
The Company commenced a process to turn around and transform Nortel in late 2005, and the Company made important progress on a number of fronts. However, the global financial crisis and recession have compounded Nortel’s financial challenges and directly impacted its ability to complete this transformation. Nortel is taking this action now, with a $2.4 billion cash position, to preserve its liquidity and fund operations during the restructuring process.
As far as its employees go, the Nortel spokesperson said the company wasn’t making any related layoff announcements. “However, our costs still need to come down. As part of our comprehensive restructuring, we do expect that there will be further layoffs.”