Nortel dumps manufacturing

Susan Taylor

OTTAWA: Nortel Networks Corp. will no longer make the telecommunications equipment it sells, announcing a deal to exit its remaining manufacturing work and contract it out to Singapore-based Flextronics International Ltd.

The deal will see Nortel, North America's biggest telecoms-equipment provider, net between $475 million and $525 million in cash, while Flextronics will oversee manufacturing work that is valued at $2.5 billion annually.

Nortel also promised to throw some light next month on the financial impact of an accounting debacle that cost its former chief executive, Frank Dunn, his job earlier this year.

In a biweekly accounting update required by regulators, it also said it will announce "limited preliminary" non-audited results for the first and second quarters of 2004 in mid-August.

Analysts said the developments helped ease some of the uncertainty hanging over shares of Brampton, Ontario-based Nortel.

Nortel stock surged more than 5 percent on Tuesday, up 36 Canadian cents, to close at C$6.70 on the Toronto Stock Exchange and was up 25 cents at $4.99 in New York.

Several analysts were favorable to the Flextronics deal.

"It liberates Nortel to really focus on system design work and sales and marketing," said Gabriel Lowy, analyst at Blaylock & Partners, who has a "buy" on the stock and owns Nortel shares. "They don't need to have this manufacturing, so there's obviously cost savings."

The deal, extending an existing agreement, will see Flextronics take over plants in Canada and Brazil. Flextronics, in talks with Nortel since January 2004, has also made an offer to buy plants in France and Northern Ireland.

The deal includes a four-year contract for manufacturing services and a three-year agreement for design services.

Nortel expects cash payments in the fourth quarter of 2005, of $475 million to $525 million for inventory and equipment and about $200 million for intangible assets. The payments will be offset by transaction costs of about $200 million.

By the fourth year of the deal, Nortel expects savings to add $75 million to $80 million to before-tax annual earnings.

On the accounting front, Nortel said it plans to issue restatements of financial results for fiscal 2003 in the third quarter of this year, and restatements of results for earlier periods soon thereafter.

The company is completing an audit that will see it restate results between 2001 and 2003. It has said it expects the restatements to halve 2003 earnings, but reduce losses in previous years.

"We still do not know what the impacts of these restatements are and how profitable Nortel really was during the last six quarters," said Lehman Brothers analyst Steve Levy in a note. "This remains the key question that needs to be answered."

Regulators in Canada and the United States are investigating Nortel's accounting. Canadian police are conducting a review to see if there is need for a criminal investigation, such as one already under way in Texas.

Nortel, which last week won court approval to delay its annual meeting, also said that if it files its 2003 results and first quarter 2004 results after Aug. 30, Export Development Canada could terminate its $750 million credit facility.