Nortel bankruptcy `a distinct possibility': RBC analyst
TORONTO - It's the return of the great Canadian pastime of guessing what lies ahead for Nortel Networks Corp. (TSX:NT) -- with at least one analyst predicting it will run out of money and go bust.
RBC Capital Markets analyst Mark Sue said bankruptcy is a"distinct possibility" in a report that marked down his share-price target for the telecommunications equipment maker to zero.
At the other end of the spectrum, Paradigm Capital's Barry Richards has a stock-price target of US$5 per share for Nortel, which he said is the highest among analysts who cover the company.
"I'm of the view that either he's right or I'm right and that everyone else in-between can't possibly be right," Richards said in an interview Thursday.
"The business should be worth a lot more than $5 a share, unless they run out of cash."
Sue's report noted that Nortel, which reported a huge third-quarter loss and dismal view of it future, has US$2.65 billion in cash "but is overwhelmed with debt and burning cash."
"Considering the worsening macro environment, Nortel's challenged industry position, and concerns related to liquidity while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road."
Sue suggested that without a government bailout or a major financial investment Nortel may run of out cash before US$1 billion in bonds mature in 2011.
Nortel was once the most valuable company in Canada before the telecom bubble burst eight years ago.
But the company, which has shrunk to less than one-third its peak size, has failed to re-establish itself as a leading player in its industry and announced Monday that it lost US$3.41 billion in the third quarter.
Richards says he thinks Sue could be right but "his argument's not a super-compelling one in that, by his own admission, they don't have a debt repayment and they're not likely to run out of cash until 2011."
"So my view is, it's a possibility but a lot of things could happen before 2011," Richards said.
Richards says his estimate that Nortel is worth US$5 per share is based on a sum-of-the-parts analysis which, in essence, looks at what the various parts of the company are worth if it's sold.
"There are now three major businesses. If I attempt to value each of them, subtract out the debt, subtract out the preferred (shares) -- what I'm left with is quite substantial. It could be a lot more than $5 too."
Richards says he values the wireless equipment business at US$2 billion, the optical equipment business at US$3 billion and the enterprise division at US$5 billion -- once they each absorb parts of Nortel's services business, which runs networks for customers.
Ross Healy, president of Strategic Analysis Corporation, said both sides of the argument have merit because Nortel has the "poorest, weakest" balance sheet in its history as a public company.
"I've been covering this company for a long time and I've never seen the balance sheet in this poor condition," Healy said.
"Having said all that, it's only poor for a high-technology kind of company," he said. "We find that, pretty much right across the board, that high-tech companies have much stronger balance sheets than the typical industrial sort of company."
Healy said he doesn't consider Nortel stock as a good investment.
"It has the characteristics of a speculation. And the speculation is that you would be hoping that somebody out there would come along -- like a Cisco Systems, or somebody like that -- who actually has a good balance sheet and would like the product lines that Nortel has to augment their own work."
Nortel stock closed Thursday at 90 cents Canadian on the TSX, up 21 cents on the day. However, that's still barely off the all-time low of 65 cents set Wednesday before the shares closed at 69 cents.
Taking account of a one-for-10 share consolidation in 2006, the new all-time low equates to 6.5 cents relative to Nortel's stock-price peak of $124.50 in mid-2000.