Nortel Networks, a telecommunications hardware maker in Toronto, has received a reception for its metro Ethernet auction that two sector bankers not involved in the deal but claiming knowledge of the situation characterized as “stalled” and “lukewarm.” Both bankers, along with a third also not directly involved in the deal but claiming knowledge, named Credit Suisse, Nortel’s historic banker, as the party auctioning the unit, mergermarket reports.

Nortel and Credit Suisse spokespeople declined comment.

On 17 September, Nortel announced its intention to divest its metro Ethernet product portfolio in conjunction with revised guidance for the third quarter and full-year 2008. Metro Ethernet systems connect city offices to the wide area network and the internet, as well as to branch offices and businesswide intranets.

According to published speculation, the value of Nortel’s metro Ethernet portfolio is roughly USD 1.5bn and could attract the likes of Huawei in China, Ericsson in Sweden and Cisco Systems in San Jose, California.

However, one of the bankers not involved said metro Ethernet is worth USD 700m in a “good” market and has attracted about 10 bidders with “lukewarm” interest. Another argued that all bidders have ceased their pursuit of the asset. And a third said both scenarios seem accurate. “I’d be surprised if anybody is interested,” he said.

USD 1.5bn is a lot to spend in this market and not many companies can afford that, said an analyst who valued the metro Ethernet division at USD 750m. Companies would have to invest a lot in order to make the business a profitable one. Potential bidders are also struggling in a weakened market. Moreover, continued the analyst, Nortel may have added pension costs to increase cash outflow of the sale.

Nortel’s stock took a sharp nosedive after warning of weak sales last month. It sank from USD 5.30 per share on 16 September to USD 2.68 per share the following day and has since declined in the general economic downturn. Nortel closed tonight at USD 1.67 per share. Its market capitalization is USD 830m, a sliver of what it was eight years ago and less than a quarter of what it was a few months ago.

When Nortel announced plans to divest metro Ethernet, which accounted for 14% of the company’s 2.6bn in sales last quarter, the company stated, “Nortel is experiencing significant pressure as carrier customers cut back their capital expenditures further than previously expected and certain enterprise and metro Ethernet customers defer new IT and optical investments.”

Charter Equity Research analyst Edward Snyder said he believed Nortel could still sell the unit. China-based telecommunications companies eager to establish a foothold in North America could ultimately surface as the most willing buyers for the metro Ethernet division. Despite Huawei and ZTE’s well-known enthusiasm to enter the market, such companies may be waiting along with the other potential suitors for Nortel to cede to the lowest possible price, Snyder speculated.

Buying Nortel’s metro Ethernet division “would be a way for a company like Huawei to move into the US and other international markets,” Snyder said. “But it’s not lost on them that they can wait for 30 days and the price will go down. I’d imagine that the market [of bidders] is pretty narrow.”

Source:ft.com