M&A Alert - July 29, 2009
Ericsson Agrees to Acquire Nortel
Transaction Overview
On July 25, 2009, Ericsson (NASDAQ: ERIC) announced that it has agreed to purchase the bulk of Nortel‘s (OTCPK: NRTL.Q) North America wireless business in a contested three way auction for $1.13b.
Target Description
Based in Toronto, Canada, Nortel, as part of its bankruptcy proceeding, is divesting its core business operations as discreet businesses. The business unit being acquired, Nortel’s largest by revenue, sells CDMA-based network equipment and services for major North American wireless carriers. Also included in the business unit are licenses on certain Nortel’s LTE technology patents. On January 14, 2009, Nortel filed for bankruptcy in the U.S., Canada and the U.K.
Buyer Description
Based in Stockholm, Sweden, Ericsson AB is a global mobile communications device and services provider. Its product includes wireless and wireline network infrastructure including IP system and media gateways, M2M solutions particularly Open IPTV, network solution/consulting services, and phones including mobile phones, accessories and PC cards (via joint venture Sony Ericsson). Given the transaction size and strategic importance, Ericsson’s CEO, Carl-Henric Svanberg, was the driver of this transaction. Magnus Mandersson, head of Ericsson Northern Europe, was recently appointed President of Ericsson CDMA operations, which will absorb the business operations acquired. Richard Lowe, Nortel’s President of Carrier Networks division, was appointed Chief Operating Officer of Ericsson.
Transaction Parameters
The consideration offered is $1.13b in cash for the bulk of Nortel’s wireless business. Ericsson won the bid over Nokia Siemens who offered $650mm in June 2009 followed by a higher bid from PE firm MatlinPatterson of $725mm. MatlinPatterson reportedly hired Nortel’s former executives including Dion Joannou (former president of Nortel’s North
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| Equity value of considerations paid | $1.13b |
| Valuation Multiples: | |
| Enterprise Value / Revenue 1 | 0.57x |
| Enterprise Value / EBITDA 2 | 2.60x |
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1. Revenue represents Nortel’s $2b North America’s CDMA revenue in FYE 2008, as per Ericsson’s press release
2. EBITDA is derived from Nortel’s Northern America Carrier Networks Division Operating Margin in 2008. AP calculated N. America percentage of global revenue and applied it to Nortel’s global Carrier Networks operating margin per Nortel’s 10K for FYE 2008.
Strategic Rationale
Nortel’s wireless CDMA and LTE products and services fit nicely with Ericsson’s wireless network and device platform. Ericsson gains CDMA contracts with North American operators such as Verizon, Sprint, U.S. Cellular, Bell Canada and Leap, as well as a license to a number of important next-generation LTE technology patents. Recent examples of LTE momentum by Ericsson include a recent win of an approximately $5b network management outsourcing contract with Sprint Nextel and a LTE network deployment deal with Verizon Wireless. Ericsson also significantly bolsters its U.S. business ($2.7b in 2008) with the addition Nortel’s business, which generated approximately $2b revenue from its North American wireless business in 2008.
Architect Partners’ Observations
Ericsson paid an attractive price for Nortel’s CDMA business cash flow. In addition, Ericsson strongly bolsters its LTE credentials with the acquisition, crucial as carriers begin to make network equipment and outsourcing decisions over the next 24 months. Given that North America is driving the adoption of LTE, market position and influence in the U.S. market is extremely important.