Analysts cautious as Nortel reduces guidance, plans reverse stock split; holders disappointed

By Ronda Fears

Nashville, Tenn., Sept. 26 - Nortel Networks Corp.'s reverse stock-split plan is a bittersweet development for holders of the convertibles and the company's lower guidance keeps analysts cautious about the name.

"We continue to believe the company is well funded but do not see any near-term upside catalysts and, in fact, believe there may be continued top-line pressure," according to a report Tuesday by convertible analysts Brian Park and Jeanine Oburchay at Wachovia Securities.

Nortel late Wednesday lowered its third quarter revenue guidance, the second time in the past month, and said it plans to seek a reverse stock split that would bring its stock price to $10-$20.

"We think it's something they need to do to stay listed, but it's not necessarily a positive for the convertibles," Oburchay said in an interview.

Holders of Nortel convertibles, while not alarmed, are not entirely happy with the plan.

"I'm not too concerned about the adjustment in the [conversion] ratio, I think that will be a wash compared to where we stand right now," said a trader at a convertible hedge fund in New York.

"Secretly I was hoping they would get delisted, go into default on the converts and we could get paid and walk away."

The reverse stock split at Thursday's closing price of 55c for Nortel would be about 1-to-27.5 in order to get to the midpoint of the company's target range.

The stock closed Wednesday below the minimum continued listing requirements of the New York Stock Exchange. In a company statement, Nortel said it would present the request to stockholders at its annual meeting in Spring 2003 and the exact ratio would be set at that time.

If the stock were to be delisted, the $1.8 billion of 4.25% convertibles due 2008 and roughly $800 million of 7% mandatory convertibles would be in default, as most people understand - although it was not immediately clear whether that would be the case. Covenants for the convertibles only commit Nortel to ensuring that shares to be issued on conversion are eligible for listing as long as its stock is listed on the New York Stock Exchange or Toronto Stock Exchange.

"Really, if you look closely, this is not a bad situation to be in, at least if you're looking at Nortel versus its peers like Lucent," the trader said.

"They've still got access to all their bank lines and are still saying they're going to reach profitability by June next year. We are not worried really. It would just be less stressful to get out of this particular situation."

Nortel stock still has a market capitalization of $2.2 billion, he noted.

Some investors have already bailed out, however.

The 4.25s were quoted down 1.25 points to 30 bid, 31 asked and the mandatory also proportionately lower at 14,550 bid, 15,550 asked. The mandatory was issued in June at par of 28,751.

Nortel shares ended down 7c to 57c.

The company now expects third quarter revenue to be down by about 15% sequentially from $2.8 billion in second quarter, after having guided lower a month ago to a decline of up to 10%, citing further deterioration in spending for wireless networks.

The company ended the second quarter with $4.86 billion in cash and equivalents, according to the Wachovia analysts.

The analysts expect the company to burn $1.8 billion in cash during the second half of 2002, giving it a cash balance of $3.1 billion at yearend. That, however, does not include cash charges associated with new restructuring activities announced on Aug. 27, which they estimate will be $600 million to $700 million.

Nortel is scheduled to report third quarter results Oct. 17.

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