Nortel may pursue bankruptcy protection: Company says it plans to strengthen financial footing

Nortel Networks Corp. has sought legal counsel regarding bankruptcy protection, according to a published report.
The Canadian networking equipment company is seeking the legal advice to protect the company from creditors in case a restructuring plan fails, according to a report in today’s Wall Street Journal. The Journal also reported that the Toronto-based company may ask the Canadian government for help.
Nortel officials would not comment on the newspaper report but did issue a company statement.
“There are those who fuel negative speculation, but there are many more who believe that Nortel has put in place the necessary plans to strengthen our financial footing and reset our cost base,” according to the statement.
The company pointed to a Standard & Poor credit rating that said Nortel “should be able to sustain adequate levels of liquidity in the next 12-18 months.”
The Wall Street Journal cited people familiar with the bankruptcy issue. In regard to seeking help from the government, the Journal cited a person familiar with the situation.
Nortel has been reeling since the economy started to spiral downward in September. For the third quarter, the company posted losses of $3.4 billion. The company’s stock has also been fluctuating since its third-quarter results were reported Nov. 10.
On Wednesday, Nortel’s stock was trading at 40 cents, a 12-cent decrease from the day before. After the company’s third-quarter results, the company’s stock fluctuated between 78 cents and 56 cents per share.
Following the company’s third-quarter financials, analysts said bankruptcy was a possibility for the company in the next couple of years.
Nortel could run out of money before 2011 when its $1 billion bonds mature, according to a note written by RBC Capital Markets’ analyst Mark Sue. He wrote that bankruptcy could be in Nortel’s future because of its challenged industry position and cash on hand.
Rebounding won’t be easy for Nortel, analysts say, because of the current economic climate and stiff competition in the market from such giants as L.M. Ericsson, Nokia Siemens Networks and Alcatel-Lucent.
Analysts said the company needs about $1 billion to operate.
According to Sue, Nortel is expected to finish the year with $2.4 billion in cash but could be down to $1.6 billion next year. Nortel also is facing a pension deficit that has been reported to be between $2.3 billion and $2.8 billion.
In his note, Sue cut his target price for Nortel to zero.
The company’s restructuring plan calls for reducing cost and preserving cash. The company said it would eliminate 2,500 jobs by the end of 2009. The company is also separating its business model into three areas. One is responsible for enterprise customers. The two others are focusing on product, services, applications, marketing, portfolio business and market development.
The company has also froze hiring and salaries and cut its travel budget. These measures are projected to save Nortel $400 million in 2009. The company is projecting a flat fourth quarter to end 2008 because of the current economic climate.
“We remain focused on executing a significant shift to our operating model and cost base to reflect the economic environment that we are now in,” according to the company statement. “Our commitment is to remain an innovation-driven organization – delivering value to our customers for the long term.”