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Wednesday, January 14, 2009

Nortel Files for Bankruptcy

TORONTO (Reuters) -- Nortel Networks Corp., North America's biggest telephone equipment maker, filed for bankruptcy Wednesday, hoping to save a once high-flying business whose decade-long decline has accelerated with the global economic crisis.

The filing marks a crucial stage in the slow deterioration of one Canada's most prominent companies. Nortel, a stock market darling before the tech bubble burst at the start of the decade and still one of the country's largest employers, has struggled for years in an industry that has changed radically since its heyday in the late 1990s.

Despite its woes, Nortel is still a big part of Corporate Canada, with 32,000 employees and major operations in Ottawa, considered the country's high-tech hub. Its payroll has also reflected its fortunes, shrinking from 90,000 in 2000.

A sharp slowdown in many of Nortel's major markets, especially the United States, has exacerbated its problems, leading the company to warn last month that its business was under increased pressure and its cash position and liquidity were deteriorating.

"It's obviously a remarkable transformation from where it was as the largest company in Canada worth about 35% of the (Toronto Stock Exchange) in 2000," said Gavin Graham, director of investments at BMO Asset Management in Toronto.

"But this is a reflection of the way that the telecommunications industry has changed."

Telecom rivals

Telecom companies have scaled back spending on the equipment that Nortel makes in a bid to clamp down on costs amid the global downturn. At the same time, the company has faced intense competition from North American and European rivals such as Alcatel-Lucent (ALU) and Ericsson (ERIC), as well as low-cost Asian vendors such as Huawei Technologies.

Shares of Nortel (NT) plunged more than 76% to 7.5 cents in electronic pre-market trading Wednesday. The TSX said it was reviewing the stock for possible delisting.

The shares have tumbled along with the company's fortunes, sinking into penny-stock territory in recent months. In mid-2000, at the zenith of the company's success, they were worth more than $896 each, adjusted for a stock consolidation that took place in late 2006.

'Avoiding slow death'

Before the stock market opened on Wednesday, Nortel said it and a number of its affiliates filed for Chapter 11 bankruptcy protection in the United States. It has also filed for protection in Canada and some of its European subsidiaries are expected to make similar filings.

"They're avoiding a slow death by doing this," UBS analyst Nikos Theodosopoulos. "The company is going to have to sell assets and change its focus. It's not going to be the same company."

The filing came a day before the Toronto-based company was due to make an interest payment of about $107 million.

"Based on this filing, the board of directors must believe that not only is the fourth quarter bad, but that the first quarter is going to be just as bad or worse," said Duncan Stewart, an analyst at DSAM Consulting in Toronto.

"Although they have cash in the short term, even the medium-term outlook is not enough to make the company viable as a going concern."

Nortel's creditors

According to its court filing in U.S. bankruptcy court for the district of Delaware, Nortel's major creditors include Bank of New York Mellon, with claims valued at nearly $4 billion.

Nortel said its operations are expected to continue without interruption and that it will continue to serve its customers worldwide. It said it has about $2.4 billion in cash.

"This process will allow Nortel to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner," the company said in a statement.

In November, it reported a $3.4 billion third-quarter loss, cut its 2008 outlook and announced 1,300 layoffs, or about 5% of its work force. It also said it would freeze salary increases, cut back on consultants and review its real estate portfolio.

On Wednesday, it said it had amended agreements with Flextronics (FLEX), its key supplier. Under the new deal, Nortel has agreed to buy $120 million of Flextronics existing inventory by July 1 and to make other quarterly purchases.

However, some of its agreements with Flextronics are being terminated as of July, Nortel said, but gave no specifics. Flextronics is also named as a major Nortel creditor in its court filings.

Nortel's 10.75% notes due in 2016 plummeted almost 10 cents Wednesday to 15 cents on the dollar as its yield rose to more than 75%, versus 50% Tuesday, according to MarketAxess data. The notes traded as high as 28.25 cents on Jan. 6. To top of page