What are private equity groups for if it is not to grind up the larger pieces of failed and failing public corporations, and turn them into smaller nuggets of wealth. So in better times (well in better times Nortel and Motorola would not be in such trouble) you’d expect them to be dispassionately carving up the corporate corpses of Nortel and Motorola.
The problem right now is that this is the kind of market where the private equity firms take a holiday. Where were they when Sirius needed a mere $530 million in debt? They left the job to the celebrated corporate shark John Malone, and not only did he get the job done, he carved himself a 40% piece of the pie. Where are they now that Tiscali is in trouble for a mere bagatelle of European debt?
The truth is that private equity needs debt, and they also need a target with a valuation or at least the prospect of an exit route ad with stock markets they way they are these days that’s not always possible. But at least a couple of them are not waiting out the recession on their boats, if reports are to be believed. Instead Advent International is trying to get a consortium of private equity firms together to buy the handset division of Motorola and core assets at Nortel, potentially including the networks equipment division, and put them together in a roll up.
The story was broken by merger watcher Mergermarket, which says it has at least a couple of independent sources behind it. We have no doubt that private equity groups ARE targeting these two companies, and we suspect a lot more than one isolated group, but there is a long way between talking about it and coming up with a workable plan which someone with money will back.
Motorola will still have too long a wait for its new Android handsets, and it would still cost a few $ billions in cash in order to work through its weaknesses. At least, as part of the Motorola group, that money is being earned by the other divisions to balance out cashflow, in a private equity deal it would have the disconcerting feel that it was being spent from a pile of interest bearing debt.
Mergermarket reports that private equity group CVC has been approached to join the consortium but turned it down. The number of separate private equity groups that would have to put their assets on the line in order to secure a deal of this type would mean that it is sure to leak, but it still doesn’t mean that there is a deal which can get done. If Motorola is keen to build up its market capitalization, it could always simply close the handset division, a suggestion that has been mooted by our US financial partner JRPG on more than one occasion.
Separately Nortel is now said to be actively courting buyers for parts of its business, including its prized wireless equipment and metro Ethernet divisions, as a way out of its Chapter XI bankruptcy. Nortel is apparently burning through its cash reserves at such an alarming rate that it can see no other way ahead.
Publicly Nortel has been saying it will develop a restructuring plan to make it viable again but unofficial sources say the grimness of the economy has done for that idea and that private equity groups and rivals have been coming and going at the Canadian group looking to buy its core wireless business, its Ethernet business and maybe its enterprise group. When Nortel went into bankruptcy it had $2.5 billion in the bank and debts of just $4.5 billion, which on paper looked extremely viable, unless orders have dried up.