Canadian government could stop Nortel-Avaya deal

Government wants proof the deal will benefit Canada but analysts claim it won't matter

The Canadian government's industry minister announced last week it will only allow Avaya to buy Toronto-based Nortel Networks's enterprise business if Avaya can prove the $US915 million deal is beneficial to Canada.

However, industry analysts believe the deal will go through.

"Let's be honest. They're not going to block the sale," said Mark Tauschek, lead analyst at London, Canada-based Info-Tech Research Group. "What are the options?"

Industry Minister Tony Clement announced the review despite the fact that he is not reviewing the more expensive foreign acquisition of Nortel's carrier wireless assets, which LM Ericsson of Sweden agreed to buy for $US1.13 billion.

"Avaya filed an application for review under the Investment Canada Act (ICA) of its proposed acquisition of Nortel's Enterprise Solutions Division," Clement stated in a press release. "The Nortel assets being sold to Avaya exceed the threshold set by the ICA ($US312 million); therefore a review is automatically required. I only approve applications where the investor demonstrates that its investment is likely to be of net benefit to Canada."

Nortel has been operating under bankruptcy protection since Jan. 14, and is trying to sell most of its business assets to repay creditors, including bond holders and former employees who are owed severance pay. The telecom equipment maker -- known for years as Northern Telecom -- once dominated the Toronto Stock Exchange but has lost money nearly every year since 1998.

Avaya originally announced in July it wanted to buy the Nortel enterprise business for $US475 million but two other bidders - rumoured to be Siemens Enterprise Communications and private equity firm MatlinPatterson - also placed bids. So an auction was held earlier this month and Avaya won after increasing its bid to $US915 million.

If Industry Canada turns down Avaya's application, then Tauschek assumes the next option is for Siemens Enterprise Communications Group (SEN Group) to acquire the assets. Though Siemens AG is based in Munich, 51 per cent of SEN Group's shares are owned by Los Angeles-based private equity firm Gores Group LLC. Gores also owns Enterasys Networks, formerly known as Cabletron.

Canada's Investment Canada Act requires a review of all foreign acquisitions, if the buyer is based in a member country of the World Trade Organization, and the value is greater than $US312 million.

That threshold refers to the book value of the assets being purchased, which could be significantly lower than the actual price paid. The Canadian government passed a law in March changing the threshold from book value to enterprise value, but that change has not taken effect.

In testimony before the House of Commons Standing Committee on Industry Science and Technology Aug. 7, Nortel Chief Strategy Officer George Riedel said the "book value" of the carrier wireless assets Ericsson is buying is only $US149 million.

Industry Canada would not divulge the book value of the assets Avaya wants to buy, only saying it is worth more than $US312 million.

An Avaya spokesperson did not know the book value.

"Avaya recognizes the authority and jurisdiction of the Minister of Industry, respects the process and looks forward to working with Industry Canada and the Investment Review Division to finalize a transaction that we believe will bring inherent benefit and value to Canada," an Avaya spokesperson stated in an e-mail to Network World Canada.

A Toronto-based analyst predicts Avaya has committed to hiring the majority of Nortel employees currently in the enterprise unit.

"Avaya wants to make sure they get the nod from the Canadian government," said Ronald Gruia, program leader for emerging telecoms at Frost & Sullivan. "They will say and do all the right things."

Gruia noted since 1985, Industry Canada has reviewed 1,500 applications from foreign companies to buy Canadian firms and rarely rejects them. One exception was an attempt by Minneapolis-based Alliant Techsystems Inc. (ATK) to acquire part of Richmond, B.C. defence contractor MacDonald, Dettwiler and Associates Ltd.

MDA agreed in January, 2008 to sell its information systems and geospatial service group to ATK, but Industry Canada rejected that deal because the industry minister at the time, Jim Prentice, was not satisfied the deal would be of net benefit to Canada.

ATK's bid sparked concerns over national security. MDA's services include: satellite ground stations; unmanned aerial reconnaissance (UAV) training for Canadian Forces in Afghanistan; service and spare parts for the CP140 airplanes, used to patrol Canada's coasts looking for foreign surface ships and submarines; and the Canadian Space Agency's Radarsat 2 satellite.

Gruia noted the rejection of MDA's agreement with ATK was an exceptional case.

"It is not a foregone conclusion that the Canadian government" will approve Avaya's bid for Nortel's enterprise assets, he said. But he added it will be easier for Avaya to get its bid approved by the Canadian government than by the U.S. Department of Justice Anti-trust division, which will examine the effect the deal would have on market share.

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