For a long time, it appeared Ciena might go unopposed in its quest to gain ownership of insolvent Nortel Networks’ Metropolitan Ethernet Networks (MEN) assets.
Adhering to the rules of the Nortel auction process, Ciena set the pace with a stalking-horse bid of $390 million in cash and 10 million in shares. Although the share component of the bid has varied in value, the Ciena proposal would have been worth $526 million at the close of trading yesterday.
From the outset, however, Nortel’s creditors weren’t entirely satisfied with a bid that wasn’t an all-cash offer. In previous auctions of Nortel business assets, involving its wireless and enterprise businesses, the former telecommunications colossus had accepted all-cash winning bids from Ericsson and Avaya, respectively.
The size of the Ciena bid, and the fact it contained a non-cash element, suggested that the competition for Nortel’s MEN assets wouldn’t be as intensive or extensive as were the auction battles for Nortel’s wireless and enterprise businesses.
In fact, Nortel had to pull out all the stops to get another bidder to contest the Ciena offer. On November 13, Nortel extended the deadline for bidding until November 17. The company seemed to be giving a second prospective bidder more time to cobble together an offer. Earlier, on November 3, two people familiar with the process said Nokia Siemens Networks (NSN) was considering a bid, according to Bloomberg.
Well, at long last, the beleaguered and conflicted NSN apparently has moved toward the auction ring. It needed assistance to do so, however, which tells you all you need to know about why the bid took so long to come together — and why Nortel had to extend the original deadline.
NSN apparently is making its bid in conjunction with private-equity firm One Equity Partners LLC, which manages $8 billion in investments for JPMorgan Chase & Co.
If you peruse One Equity’s investment portfolio, you’ll notice that it doesn’t exactly specialize in the telecommunications-equipment space. It has money, though, and that clearly was a draw for NSN, which is going through a dark night of the corporate soul as well as a difficult restructuring. At one point, one or both of its joint venture partners were said to be contemplating abandonment of the enterprise, with Siemens AG particularly uncertain about its commitment to the business.
Now, though, it appears NSN will make a bid. We know neither how high that bid will be nor how high Ciena will be willing to go to claim Nortel’s MEN assets. Many analysts who follow Ciena, as well as certain large investors in the company, would prefer not to see it escalate its offer much beyond the level set by the stalking-horse bid.
Something to keep in mind is that Nortel’s MEN business isn’t exactly firing on all cylinders. After some delay, Nortel reported its third-quarter financial results earlier this week; and, as one might expect from an insolvent company going through bankruptcy-related dissolution, Nortel is not doing well. Of the continuing operations that it fully owned, the MEN business saw the biggest year-over-year quarterly revenue decline. For the third quarter of fiscal year 2009, Nortel’s MEN business generated $295 million in revenue, down 26 percent from revenue of $398 million in the third quarter of 2008.
That’s not to say that somebody couldn’t acquire it, rehabilitate it, and get it back on track. It might be a fixer-upper property worth considering. It’s still a challenge, though, and neither Ciena nor NSN can afford to overpay extravagantly. If the bidding rises above $800 million, the ostensible winner of this auction eventually might be seen as the loser.
Regardless of the outcome, the auction will kick off tomorrow.