Telecom August 10, 2009, 10:15PM EST

Optimism Rises for Nortel Unit Sell-offs

The telecom equipment vendor's second-quarter results suggest that its for-sale businesses may have an easier time attracting buyers

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Financial results released Aug. 10 by Nortel suggest that the outlook for the company's on-the-block businesses may not be as bleak as previously thought.

Nortel, which is selling off its various divisions after slumping into bankruptcy, released second-quarter results that beat expectations. Sales fell 25% from a year earlier, but jumped 14% from the first quarter, when the debt-burdened maker of telecom equipment said it was seeking protection from creditors. The company's losses widened to $274 million, from $113 million a year earlier, in part due to the costs of reorganization. But the company's cash rose slightly.

Taken together, the numbers suggest Nortel may have an easier time finding buyers for some divisions that remain up for sale. "It's not like they are in free fall," says Akshay Sharma, a research director at consulting firm Gartner (IT). Nortel's other businesses "should be more attractive now." Would-be customers, in turn, are likely to be more comfortable about doing business with Nortel as confidence rises that its operations will be in the hands of stable parent companies. "People are now understanding [that Nortel] is not going to disappear," says Ronald Gruia, principal analyst at Frost & Sullivan.

The selling of Nortel's divisions is well under way. In an auction that wrapped up in July, Nortel sold much of its wireless equipment business to rival vendor Ericsson for $1.13 billion. On July 20, Nortel also said it had lined up Avaya as a tentative buyer—a so-called "stalking horse" bidder—for the unit that sells telecommunications equipment to corporations; it is expected to be auctioned off in September.

"A Labor of Love," Says Departing CEO

The remaining Nortel businesses are likely to attract stalking-horse bidders and subsequent auctions, says CEO Mike Zafirovski, whose immediate departure was also announced on Aug. 10. "I am pretty confident that [remaining management] would be able to bring stalking horses before the quarter is over," Zafirovski tells BusinessWeek.com. The company also shrunk its board to three members, from nine.

"It was a labor of love," Zafirovski says of his time at Nortel. "I feel good about where the company is at right now. This Chapter 11 process has really allowed us to stabilize the business." He says he plans to take time off and maybe travel, and then return to work. "I won't be retiring at the age of 55."

Potential acquirers of Nortel's metro Ethernet business, which makes gear for broadband networks, could include Juniper Networks (JNPR), Sharma says. The two companies have close ties. Nortel Chief Strategy Officer George Riedel, who will take over sales discussions from Zafirovski, was in charge of strategy and corporate development at Juniper until moving to Nortel in 2006. Juniper's chief marketing officer, Lauren Flaherty, held that post at Nortel until last year.