Nortel on Monday announced that it is selling its Blade Server Switch Business Unit to a new company that plans to focus exclusively on building network switches for the fast-growing blade server market.

Vikram Mehta, who has been at the helm of Nortel’s blade switch business since its inception four years ago, will head up the new company, called Blade Network Technologies. Nortel was one of the first networking companies to dive into the blade server market, inking partnerships with IBM and HP. Today, there are more than 52,000 Nortel blade switches in deployment.

While Nortel continues to see opportunity in the blade server switch market, it decided that the investment was not “consistent with our business transformation strategy, which includes focusing on only those technologies that are strategic for our core business going forward,” says Eric Schoch, vice president of business development at Nortel and a Blade Network Technologies board member.

Garnett & Helfrich Capital, a private equity firm focused on spinning out business from large technology companies, is backing Blade Network Technologies and is the controlling shareholder. Nortel will hold a minority interest in the new venture. Financial details of the deal were not disclosed.

“We believe this is not only the fastest growing segment in the server space, but arguably one of the fastest growing opportunities in the networking space,” says David Helfrich, managing director of Garnett & Helfrich Capital and chairman of the board for Blade Network Technologies.

The new company will have an edge on competitors such as Cisco because of its singular focus on creating networking equipment specifically for the blade server market, Mehta says. That market is expected to grow from $2 billion today to $10 billion by 2009, when it will account for about 20% of all servers sold, according to IDC.

“Unlike a lot of network equipment vendors that are very focused on serving the networking people inside of a Fortune 500 company, the blade server guys want to sell an integrated solution to the people that are responsible for purchasing servers,” says Mehta. “Blade Network Technologies’ business model and how we support the server vendors, how we price our products and how we assist our customers in deploying these solutions is very honed to how these server vendors operate. I think that that provides us with a significant advantage.”