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Nortel files for bankruptcy protection, shares plunge

(Agencies)
Updated: 2009-01-14 23:59

TORONTO – Nortel Networks Corp, North America's biggest maker of telephone equipment, filed for bankruptcy protection on Wednesday, as the global economic downturn further erodes its once high-flying business.

A Nortel sign is seen in downtown Toronto February 27, 2008. [Agencies]

The filing came a day before the Toronto-based company was due to make an interest payment of about $107 million.

Nortel and a number of its affiliates filed for Chapter 11 bankruptcy protection in the United States, according to a court filing.

Its shares plunged more than 76 percent to 7.5 cents in electronic pre-market trading.

"Based on this filing, the board of directors must believe that not only is the fourth quarter bad, but that the first quarter is going to be just as bad or worse," said Duncan Stewart, an analyst at DSAM Consulting in Toronto.

"Although they have cash in the short term, even the medium-term outlook is not enough to make the company viable as a going concern."

According to the court filing in US bankruptcy court for the district of Delaware, Nortel's major creditors include Bank of New York Mellon, with claims valued at nearly $4 billion.

Nortel's shares have tumbled along with the company's fortunes, sinking into penny-stock territory in recent months. In mid-2000, at the zenith of the company's success, they were worth more than C$1,100 each, adjusted for a stock consolidation that took place in late 2006.

"It's obviously a remarkable transformation from where it was as the largest company in Canada worth about 35 percent of the TSX in 2000," said Gavin Graham, director of investments at BMO Asset Management.

"But this is a reflection of the way that the telecommunications industry has changed."

Nortel has faced intense competition from North American and European rivals such as Alcatel-Lucent, as well as low-cost Asian vendors such as Huawei Technologies.

The company has also suffered as telecom companies scale back spending on the equipment that Nortel makes.

The global economic slowdown has exacerbated Nortel's problems, leading it to warn last month that because of current conditions, its business was coming under increased pressure and its cash position and liquidity were deteriorating.

In November, it reported a $3.4 billion third-quarter loss, cut its 2008 outlook and announced 1,300 layoffs, or about 5 percent of its workforce. It also said it would freeze salary increases, cut back on consultants and review its real estate portfolio.