Nortel Networks says Avaya has agreed to pay US$475 million for its business communications unit

TORONTO - Nortel Networks Corp. has reached an agreement to sell off most of its Enterprise Solutions unit, in a deal that will potentially see a key chunk of its remaining business go to Avaya Inc. for US$475 million.

The Enterprise unit supplies phone systems and other communications equipment to businesses and large organizations around the world, and had remained one of the biggest parts of the business that hadn't found a buyer.

Nortel president and CEO Mike Zafirovski in an interview it was an orderly sale of a well-performing businesses.

"We're very confident that this is a great thing for employees and for customers," Zafirovski said in an interview.

New Jersey-based Avaya -- spun off from Lucent several years ago -- has been a rival of Nortel and has long been considered a leading contender to buy the Toronto-based company's Enterprise unit, which sells critical communication systems to the IT departments of companies and public-sector organizations.

Zafirovski noted that Avaya would assume a $28 million loan as part of the agreement. However, they would not obtain receivables or cash and would only get the rights to Nortel patents used exclusively in that division of the technology firm.

Included in the package would be shares of Nortel Government Solutions Inc. -- the former PEC Solutions Inc. -- and software developer DiamondWare Ltd. Nortel Government Solutions integrates and operates network services for the U.S. air force, army and navy, the U.S. homeland security and various federal, state and local government clients.

"This is a strategic opportunity to acquire talent and complementary assets that position the combined company for growth and success," said Avaya president and chief executive Kevin Kennedy.

"We are committed to protecting the communications investments of the customers of Avaya and Nortel, and to effectively executing the integration of Nortel Enterprise Solutions and Avaya."

Neither of the companies would provide an estimate on the number of employees in the Enterprise division.

Nortel has been operating under court protection from its creditors since January.

It describes the offer from Avaya as a "stalking horse" agreement, suggesting Nortel hopes to use it to prompt other potential bidders to strike a better deal.

From here, Nortel said it will seek approval on the process from the United States Bankruptcy Court in Delaware, the Ontario Superior Court of Justice, as well as courts in France and Israel.

The enterprise business represented about 20 per cent of Nortel's overall annual revenue according the most recently available financial statements.

Duncan Stewart, director of research and analysis at DSam Consulting, suggested that the current bidding price was a "little light" compared to general market expectations, which had ranged from about $500 million to $750 million.

"It's always been a really good business," Stewart suggested, noting that the division benefits from products like office phone systems, which tend to lock consumers in for future sales and ensure a relatively secure revenue source.

However, the Avaya offer also intensifies the bidding process with New York-based MatlinPatterson Global Advisors, which wants to submit a bid for all of the remaining pieces of the company and help fix its financial troubles.

Avaya's entry into the process could spark a bidding war from MatlinPatterson, which could in turn drive up its overall offer for the entire company.

That could push Nokia Siemens' US$650 million offer for Nortel's wireless division even higher.

The deadline for bidding submissions for the wireless division is Tuesday at 4 p.m. ET.

Zafirovski said that none of the bids include the rights to the Nortel brand name, though the company was still willing to look at its options.

"People have expressed interest in the brand and it's open for discussion," he said.

Nortel had originally intended to reorganize as a smaller independent business but more recently it has been selling all of its major assets.

The International Nortel Networks Users Association, which represents more than 4,000 Nortel customers around the world, said it supports the agreement with Avaya.

"The strength of the enterprise solutions portfolio has never been in question, and the Avaya acquisition could enable a more effective go-to-market strategy for these solutions and strengthen the market position of the company," it said in a release.