By Ben Dummett
Of DOW JONES NEWSWIRES
TORONTO -(Dow Jones)- Avaya Inc. agreed to acquire Nortel Networks Corp.'s (NRTLQ) money-losing division that makes phone systems for businesses for $900 million, plus an additional $15 million for an employee-retention program. This marks the end of a drawn-out auction for the operation that started Friday but dragged on until early Monday morning before wrapping.
Avaya Inc., which is owned by private equity firm Silver Lake Partners LP and TPG Capital LLP, beat out Siemens Enterprise Communications for the Toronto telecom-equipment vendor's enterprise business.
Siemens Enterprise is a joint venture between Germany's Siemens AG (SI) and the venture's majority owner and private equity firm Gores Group LLC.
Though the auction started Friday morning, actual bidding didn't start for several hours that day because a number of technical issues first had to be resolved, according to sources. Other details explaining the auction's length couldn't be learned.
The transaction will enable Nortel's "customers to compete in new ways with greater scale and resources," Joel Hackney, head of Nortel's enterprise business, said in a release.
The acquisition will make Avaya a more formidable competitor against rival and industry leader Cisco Systems Inc. (CSCO), potentially enhancing the ability of Avaya's private-equity owners to ultimately sell the combined business at a higher value.
The transaction allows Avaya's market share to surpass that of industry leader Cisco Systems Inc. (CSCO) in North America, giving it access to Nortel's blue-chip corporate customers, which include more than 80 of the Fortune 100 companies. Avaya will also be able to expand its distribution capability through Nortel's network of reseller partners.
"It will also prevent a competitor like Siemens from getting stronger," Ronald Gruia, a principal telecom analyst at consulting firm Frost & Sullivan, said ahead of the auction. Unlike its operations in Europe, Siemens Enterprises North American business is relatively small.
Cisco's share of the total enterprise telecom-equipment market in North America is about 21%. However, Avaya's share will jump to 27% from about 17%-18% as a result of the acquisition, according to Frost & Sullivan.
The transaction is conditional on approval from the bankruptcy courts in both Canada and the U.S. A joint hearing on the transaction is scheduled for Tuesday. Courts in France and Israel also need to approve the transaction.
Ahead of the auction, the prospect of Avaya winning the auction was controversial for some.
In a court filing Thursday, Verizon Communications Inc. (VZ) said the sale of Nortel's enterprise business to Avaya could jeopardize U.S. law enforcement, anti-terrorism and national defense interests because Avaya wouldn't take on Verizon's support contracts. In response, Avaya said it was in discussions with Verizon to try to negotiate arrangements to support the Verizon contracts.
Ahead of the auction, Sotel Systems, a closely held telecom-equipment reseller based in St. Louis, warned against Avaya's bid succeeding because it and Cisco would create a duopoly. Competition will decline, consumer choice would suffer, and ultimately prices would rise, Sotel cautioned.
In addition, MatlinPatterson Global Advisers LLC, which owns about $400 million of Nortel's nearly $4.2 billion of debt, in a July court filing complained that Nortel's pact with Avaya allows Avaya to abandon the deal if regulators require it to sell assets to comply with antitrust rules.
Analysts have suggested antitrust regulators would be more likely to force Avaya to shed assets as part of approving the transaction if it is scrutinized on a product-by-product basis. For example, the combined market share of Avaya and Nortel's business selling phone systems for call centers could cause concern because it could exceed the key threshold level of around 43%, some analysts have speculated.
Others also complained the agreement allows Avaya to drag out the approval process for the transaction over several months, potentially allowing it to woo Nortel's enterprise customers and business partners during the interim even if its bid is ultimately rejected. That process could lower the value of the enterprise business for the next bidder in line.
Avaya has declined to comment.
Still, the deal has its supporters.
"With the announcement of today's purchase by Avaya, we look forward to extending that relationship forward to serve the business communications needs of our constituency base across the globe," said Victor Bohnert, executive director of the International Nortel Networks Users Association.
Nortel held the auction as part of its ongoing efforts to sell itself piecemeal under bankruptcy protection, which it sought in January because of the sharp downturn in demand for telecom gear as result of the faltering economy.
In July, Nortel agreed to Avaya's stalking horse bid of $475 million, triggering Friday's auction for the enterprise business.
Nortel agreed to sell its wireless network business, including its coveted next-generation wireless technology, in July to Sweden's L.M. Ericsson Telephone Co. (ERIC) for $1.13 billion in an auction in July.
Research In Motion Ltd. (RIMM), maker of the Blackberry email wireless device, wants the Canadian government to review the sale of Nortel's wireless assets to L.M. Ericsson, arguing Canada risks losing the benefits from the development of a new technology that could become the standard for wireless communications around the world.
The Canadian government has yet to say whether it will take any action.
L.M. Ericsson will offer jobs to at least 2,500 of the roughly 3,100 employees at the Nortel wireless units as part of the deal, arguing the transaction will strengthen its "long-standing commitment to Canada."
Neither Nortel nor Avaya mention in their release if Avaya has agreed to maintain a certain number of jobs once the transaction is completed. However, the companies said Avaya will offer a pool of $15 million for employee retention.
In addition to the wireless and enterprise businesses, Nortel plans to auction off its business selling optical gear for metropolitan networks as well as its business unit that makes Internet-based phone technology for carriers.
-Ben Dummett, Dow Jones Newswires; 416-306-2024; ben.dummett@dowjones.com
(Andy Georgiades in Toronto and Peg Brickley in Washington contributed to this article.)