Saturday, January 24, 2004
Nortel may divest all manufacturing to Flextronics
JEFFREY HODGSON
REUTERS
TORONTO: Nortel Networks Corp., one of the world's biggest telecom equipment providers, said on Thursday it was in talks to hive off the last of its manufacturing facilities in a move that could affect about 7 percent of staff.
Brampton, Ontario-based Nortel said it was negotiating with contract electronics manufacturer Flextronics International to divest manufacturing operations in Canada, Brazil, Northern Ireland and France.
Nortel said the move would let it focus on developing new products and technologies and supporting customers in a cutthroat market where demand is only now starting to recover after years of decline.
"At this stage, however, there can be no assurances that these discussions will lead to a binding agreement," Nortel said in a statement.
If a deal materializes, Singapore-based Flextronics would receive more than $2 billion in annual revenues and take over more than $500 million of Nortel's manufacturing and inventory assets. In return Nortel would get more than $500 million in cash, over nine months.
Nortel, which has divested much of its manufacturing capacity over the past five years, said the deal would affect about 2,500 employees, including 1,500 in Canada. But it said similar deals in the past saw a significant number of staff get jobs with the acquiring company.
Nortel currently has about 35,500 workers, down from a peak of about 95,000 at the height of the technology bubble.
"The Flextronics thing is unequivocally a positive thing... (Nortel) still sell, they still invent, they still design the prototypes, they still listen to the customers. They still service the products," said Duncan Stewart, a portfolio manager with Tera Capital in Toronto, which owns Nortel shares.
"No offense, but whacking pieces of steel together is not a particularly interesting business," he added.
NORTEL SHARES OFF
Nortel shares, which have risen almost 50 percent this year on new orders, closed down 69 Canadian cents at C$8.18 in Toronto on volume of more than 53 million.
In New York, the stock fell 49 cents to $6.34 on volume of more than 33 million. Flextronics shares rose 18 cents to $17.50 on Nasdaq.
Analysts said Nortel's stock move was part of a broader decline among telecom equipment makers, which also saw rival Lucent Technologies Inc. fall.
CIBC World Markets analyst Steve Kamman said the deal should help Nortel cut costs and become more flexible. But it also -- and more importantly -- showed that demand for telecom equipment is recovering.
"It's another good sign that Nortel's order patterns and manufacturing have stabilized enough that they can sit down and hammer out a long-term deal that involves cash changing hands," said Kamman, who has a "sector perform" rating on the stock and does not own shares. CIBC has done banking for Nortel.
But the proposed exit from manufacturing did not impress all analysts.
"I'm a little bit indifferent to it. The vast majority of Nortel's manufacturing has been outsourced already. In the downturn, when volumes were dropping and cash was a problem it was a tremendously important strategy," said Paul Sagawa, an analyst with Sanford Bernstein.
"The leverage that you would ordinarily get in the upside of demand rising and the factories being more fully utilized no longer accrues to you but accrues to Flextronics...I suspect at best it's going to be a wash."
The facilities which may be transferred to Flextronics are based in Montreal and Calgary in Canada, Campinas in Brazil, Monkstown in Northern Ireland, and Chateaudun in France.
Nortel said 800 of its 1,700 staff in Montreal are involved in manufacturing, as are 700 of its 1,500 Calgary staff.
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