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Verizon, Politics, Cloud Pending Nortel Enterprise Auction

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September 11, 2009

Verizon, Politics, Cloud Pending Nortel Enterprise Auction

By Brendan B. Read, Senior Contributing Editor

When Swedish wireless giant Ericsson won tottering Canada-based communications equipment make Nortel’s CDMA/LTE wireless division for $1.13 billion at the end of July, Research in Motion (News - Alert) protested on Canadian national interest and security grounds.

Now Verizon has done likewise on the eve of the auction Friday Sept.11 to sell Nortel’s (News - Alert) enterprise division on a similar basis, whose sale ironically coinciding with the eighth anniversary of the infamous terrorist attacks on the World Trade Center and the Pentagon.
The Ottawa Citizen reported Sept.10 that Verizon (News - Alert) Communications plans to object on U.S. national security grounds to the potential sale of the Nortel Networks Enterprise division.
Kevin Gross, the U.S. bankruptcy court judge handling the Nortel case, scheduled an emergency teleconference for late Thursday to deal with the objections.
Verizon said in a filing it will object if Avaya (News - Alert) wins an auction for the Nortel assets because the U.S. national defense could be harmed. Avaya has a $475 million stalking horse bid for Nortel.
The story said that the giant U.S. phone company is Nortel’s biggest customer. It sells corporate communication gear made by Nortel to many U.S. defense, national security, and spy agencies as well as other customers.
Verizon lawyers said in court filings that Avaya has decided it would terminate support and service contracts that Verizon had with Nortel if it wins the auction. They warned the action creates “a significant risk of disruption” to critical national security operations and create “a significant hazard to the public’s welfare. “
That’s not the only trouble the sale, and Nortel is facing. The Canwest News Service reported last week that the Internal Revenue Service (IRS) has submitted an unexpectedly large US$3-billion claim for back taxes, interest and/or penalties.
That’s bad news for Nortel’s pensioners. If Judge Kevin Gross accepts all or most of the claim as valid, “it will deplete whatever is available to other creditors,” said Tony Marsh, a spokesman for Nortel retirees told the news service. “That’s a pretty scary number.”
If Nortel completes the sale of its global assets as planned, it is expected to have little more than $5-billion in cash to distribute. This is to be applied against more than $10-billion worth of claims arising from creditors in Canada, the United States, the United Kingdom and many other jurisdictions.
However, if the new claim from the IRS is added, the settlement ratio would tumble to less than 40 cents.
The IRS claim, if proved valid, would apply only to Nortel’s U. S. unit, Nortel Networks Inc. Since tax claims often receive priority in a bankruptcy proceeding, this raises the possibility of wiping out a substantial majority of the claims from U. S. bondholders, suppliers and employees owed severance pay.
This, in turn, would intensify the pressure for U. S. claimants in the meantime to prevent further transfers of cash from Nortel’s U. S. operations to Canada. Under Nortel’s structure, the company shifts money from cash-rich regions such as the United States (where revenues generally exceed expenses) to jurisdictions such as Canada: which does a lot of expensive R&D but generates relatively few revenues.
Canadian creditors had been concerned that Nortel Canada’s low cash balances will translate into a claims settlement ratio as low as 12 cents on the dollar, while U. S. and British claimants were expected to receive 45 cents on the dollar. The IRS move could significantly deteriorate the U. S. return rate.
These foibles are playing into the Canadian political picture; Parliament resumes sitting Monday Sept.14. Though the minority Conservative government has opened a lead in the opinion polls, it is appearing increasingly likely that the opposition parties: the Liberals, New Democrats, and the Bloc Quebecois will force a fall election by voting on an non-confidence motion later this month..
“[Prime Minister] Stephen Harper let Nortel fail,” said Liberal Leader Michael Ignatieff, following a visit to RIM’s Waterloo, Ont. HQ Tuesday Sept.8, in a release. “His government didn’t think it was in the national interest to keep Canada’s single largest source of private research and development from going bankrupt – and they have yet to conduct their mandatory review of the sale of Nortel’s high-tech assets to a foreign company.”

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Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Michael Dinan

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