Nortel Global Businesses Rescued via Formal Insolvency
Alan Bloom, Partner, Stephen Harris, Executive Director, and Simon Edel, Director, Ernst & Young LLP, London, UK
Nortel Networks ('Nortel'), a global supplier of endto- end telecommunication technology products and solutions with global revenues in 2008 of USD 10.4 billion, filed for simultaneous insolvency protection orders in January 2009 in the United States (Chapter 11), Canada (CCAA), and in Europe (English Administration under the EC Regulation on Insolvency Proceedings 2000 ('the EC Regulation')). The insolvency has thus been managed across four broad theatres of activity, the USA, Canada, Europe and the Rest of the World (unfiled outside formal process).
The Nortel trading insolvency is remarkable demonstrating clearly the ability to trade a global business in insolvency for a significant period, almost two years to date, across numerous jurisdictions with limited disruption to the operational efficiency of the business. There has been minimal requirement for cross border protocols from the European perspective. In Europe there has been a conspicuous absence of unplanned secondary proceedings, a feature and a problem in some recent trading insolvencies. The progress to date is a testament to the effectiveness of the EC Regulation.
Nortel pre insolvency
Nortel is a fallen angel. It originated from the manufacturing division of Bell Telephone Company of Canada which was later spun off and incorporated as Northern Electric & Manufacturing Company Limited in 1895. Following a series of acquisitions and name changes, the group became Nortel. Nortel operated several truly global business lines across three key market segments being;
Enterprise solutions providing telecom and technology solutions to large corporations;
Carrier Networks providing wireless infrastructure radio technologies, wireline voice products and solutions to telecom service providers; and
Metro Ethernet Networks providing optical and data networking products and services to service providers.
Nortel was listed on the Toronto Stock Exchange ('TSX'). At the height of the dot-com boom in 2000, Nortel generated approximately USD 30 billion of revenue and employed approximately 93,000 people worldwide. The market capitalisation of Nortel is reputed itself to have represented more than a third of the total value of all the companies listed on the TSX at its height.
Throughout the last decade Nortel faced increasing challenges owing to market saturation and the end of the technology boom. In response Nortel announced five separate restructuring plans over successive years, each focused on reducing real estate costs and a reduction in headcount. In addition to operational restructuring, Nortel sought to refinance its debt obligations without success. In the sustained adverse climate Nortel suffered a series of credit downgrades. Concurrently Nortel sought several M&A solutions without success. The global and highly integrated nature of its businesses, with, each legal entity typically trading all business lines, created logistical exit hurdles. Prospective purchasers in the pre-insolvency filing era cited complex separation issues and Nortels debt and cost structure as problematic.
By the end of 2008, Nortel reported global revenues of USD 10.4 billion, a net loss of USD 5.8 billion (including a non-cash write off of goodwill of USD 2.4 billion) and had approximately 30,000 employees. In the final period pre insolvency increasing liquidity pressures including a class action settlement and pending interest on USD 4 billion of debt obligations led the directors to seek creditor protection/ file for insolvency proceedings. Significantly, at the date of filing the Nortel group had approximately USD 2.4 billion of cash and cash equivalents across its 150 entities. The board felt that with this available, restructuring could take place within the filed entities, with a view to an exit, leaner and fitter, at some future date.
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