 In his research note to yours truly this morning, RBC Capital Markets Mananging Director - Mark Sue appears to have forebodingly written the last rites for Nortel by lowering his price target for Nortel stock from $1.50 per share to $0 (i.e. zero, nil, zilch), warning that common equity holders are last in line during a bankruptcy which he considers a distinct possibility for Nortel. |
Nortel's future has been called into question a lot this week, but why go so far as to issue a price forecast of $0 for Nortel common stock?
 According to Sue (quoting with permission): "The world moved on while Nortel was stuck in restructuring mode, and the lack of financial flexibility means Nortel has to rely on asset sales to fund future operations. Our cashflow analysis points to an increasingly challenging outlook. Without government intervention or major financial sponsors, Nortel may run of out cash before its $1B 2011 bonds mature. |
"Assets sales couldn't have come at a worse time, and due to Nortel's distressed situation, potential bidders for the company's Metro Ethernet assets may offer subsequently distressed prices. Metro Ethernet was supposed to be on a run rate of $2B next year including services, yet the growth prospects have declined in recent quarters.
"With Metro Ethernet fetching only a small fraction of its intended price, Nortel may in turn decide to sell its CDMA assets as well.
"We're not sure Nortel can sell more than half of the company without triggering its asset sale debt covenants.
"We assume pension liabilities tied to Metro Ethernet may be over $500M. Speaking of which, Nortel's pension was underfunded by $1.1B at the end of last year. Approximately 53% of the $8.1B plan was invested in equities. Suggesting a decline of 40%, the deficit may swell to $2.8B."
Sue continued: "Nortel started 2008 with total cash of $3.2B but has had negative FCF (Free Cash Flow) of ($607M) YTD. If it burns another ($250M) during the fourth quarter, Nortel will finish 2008 with cash of $2.4B. Next year may be more problematic, with $800M in burn a possible scenario based on working capital use of ($300M), meaning net cash may be closer to $1.6B. Nortel needs $1B to run its business and another $500M for the Chinese JVs, so the situation is looking very difficult.
Nortel Stock Price Chart:
Related story:
Final blog post for Nortel chief technology officer John Roese
When a stock analyst has a price target of $0 for your stock, isn't that pretty much a "clue" that perhaps your company (i.e. Nortel) is already DEAD?
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