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Nortel moves to sell its interest in LG-Nortel joint venture – What's next?

An Internet Protocol phone from LG-Nortel

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RESEARCH TRIANGLE PARK, N.C. – The fire sale is officially underway at Nortel.

In a statement Wednesday, Nortel said it would “seek a buyer” for its majority ownership of LG-Nortel. The joint venture with Korea-based LG Electronics is one of Nortel’s crown jewels, a profit center for the telecommunications gear maker that filed for bankruptcy in January.

(Update: Thursday morning, Bloomberg reported that Nortel received permission from a French court to sell its research and development group in France.)

Sadly, LG-Nortel is also one of the company’s few success stories in recent years. Created in 2005, the joint venture produced a $341 million “management operating margin” in 2008. The MOM is sales less cost of revenues, selling, general and administrative expenses and research and development costs. Nortel, which employs some 2,000 people in the Triangle, owns 50 percent of the stock plus one share.

“Nortel has made this decision to secure a sound future for the LG-Nortel business, its valued customers and loyal employees,” Nortel said in a statement.

“LG-Nortel is a profitable, standalone business with a strong balance sheet and has not filed for creditor protection,” it added. “The joint venture has enjoyed solid revenues and profits since its establishment in November 2005, with several significant customer wins in Korea and abroad.”

The joint venture was an initiative of former Nortel CEO Bill Owens.

In recent weeks, rumors have circulated widely that Nortel’s bankruptcy strategy would lead to the selling off of various business units. As part of ongoing restructuring moves, Chief Executive Officer Mike Zafirovski has positioned various business units to be capable of standing on their own.

“LG-Nortel is a successful business with an accomplished leadership team, a culture of innovation, a dedicated employee base and a drive to succeed," Zafirovski said in the announcement. "As we work to evaluate the ultimate path forward for all of our businesses, this decision will allow LG-Nortel to embark on the next phase of its journey and realize its full potential."

LG Electronics told Bloomberg via e-mail that it has not made a decision about its role in the joint venture.

However, Nortel said LG Electronics has agreed to the “proposed sales process.” Nortel must now win court approval for the deal. Nortel already has designated Goldman Sachs “to assist with the proposed divestiture.”

Nortel already has sold off one small group for some $18 million.

By selling LG-Nortel, however, one has to wonder what damage will be done to Nortel’s long-term viability. As Peter MacKinnon, the chairman and the general manager of the joint venture, pointed out:

"LG-Nortel is a strong, independent, technologically astute and commercially savvy organization. With a competitive portfolio of wireless, wireline and enterprise solutions, LG-Nortel is a market leader in Korea and select international markets. Our number one priority is the continued success of LG-Nortel and our customers."

Once Nortel’s reorganization and sales of other units – assuming they occur – what will be said of the Nortel remnants?

James Bagnall, a journalist with the Ottawa Citizen who has covered Nortel for many years, wrote a month ago that the company was “disintegrating.”

In a story headlined “The end-game is unfolding rapidly at Nortel,” Bagnall said that one business unit could be sold at any time and others are on the auction block.

“Nortel insiders talk of a culture in which there is near complete focus on selling off the businesses – from telephone-switching gear to wireless networks,” he said.

Has the process begun?

The Skinny

WRAL Local Tech Wire Publisher and Editor Rick Smith dishes out tidbits from the local technology sector. Read more articles…