Nortel assets to boost Ericsson presence in North America

Updated:2009/7/27 13:22

US and Canadian courts are tomorrow expected to approve Ericsson's $1.1bn bid for most of the core wireless assets of Nortel Networks, the Canadian telecoms equipment company operating under Chapter 11 bankruptcy protection.

The assets include Nortel's businesses in the CDMA wireless technology used in North America.

Ericsson outbid Nokia Siemens and MatlinPatterson at the end of a six-round, nearly 12-hour auction that finished late on Friday night in New York.

Richard Lowe, head of Nortel's wireless business, described it as "a very positive outcome" and said both employees and customers had expressed support for the deal.

When completed, it will significantly expand Ericsson's footprint in North America, mark its return to the CDMA business four years after it withdrew from this market segment and consolidate the Swedish company's position as leading global telecoms equipment supplier.

The deal means that a full break-up of Nortel, which filed for protection in mid-January after its telecoms customers scaled back their equipment purchases, is almost certain.

Nortel has accepted a $450m "stalking horse" bid from Avaya for its corporate networking operations although other bids for that unit could still emerge.

Ericsson's victory represents a vindication of the auction process established by Nortel and its financial advisers, and a potentially serious setback for Nokia Siemens, which had hoped to use the Nortel unit to boost its North American presence and offset an expected decline in its global market share.

Ericsson is paying almost double the $650m Nokia Siemens had offered in its initial bid almost a month ago for Nortel's profitable CDMA wireless equipment operations and its next generation LTE (Long Term Evolution) business. Together the units employ about 2,500 people out of Nortel's total 30,000.

The agreement includes key CDMA contracts that Nortel holds with North American operators such as Verizon Wireless, Sprint Nextel, US Cellular, Bell Canada and Leap, as well as LTE assets, certain patents and patent licences relating to CDMA and LTE.

The latter has emerged as the global standard for the 4G networks most of the largest mobile network operators will build over the next five to 10 years.

Nortel's North American CDMA operations generated approximately $2bn in revenues last year, with robust profitability from a good product mix, which includes a significant amount of services.

Going forward, research and development costs are expected to be relatively low in CDMA compared with other technologies.

"Acquiring Nortel's North American CDMA business allows us to serve this important region better as we build relationships for the future migration to LTE," said Carl-Henric Svanberg, Ericsson's chief executive, who noted that the deal would provide the scale in the CDMA market it had been unable to build on its own.

But he hinted that the main appeal was Nortel's relationships with the big US network operators Ericsson hopes to sell LTE equipment to in the future.

"It is obviously some advantage having the customers that will eventually migrate to the next generation technology," he noted before the auction.

After the result was announced, he said: "By adding some 2,500 highly skilled employees, of which about 400 are focused on LTE research and development, Ericsson reinforces and expands a long-term commitment to North America."

Taken together, Nortel's CDMA North American operations and Ericsson's existing GSM and WCDMA operations will make North America the largest region within Ericsson.

The Swedish group said the transaction would have a positive impact on profits within a year of closing, which is expected to take place in the third quarter.

In spite of the setback, Nokia Siemens said it would sustain its recent momentum in the North American market.
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