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Nortel's Big Sell

UPDATED

After six months of non-stop negotiations, Nortel has reached an agreement to sell its remaining optical, wireless and enterprise production facilities to Flextronics . Nortel pursued the deal to cut costs and become more responsive to the turbulent network equipment market.

Nortel will receive between $675 million and $725 million in staggered cash payments for factories and inventory in Brazil and Canada and is finalizing the sale of plants in France and Northern Ireland (regulatory clearance and meetings with union officials must occur first).

It will also transfer 2,500 employees, or about 7 percent of its workforce, to the outsourced manufacturer. Many of the workers are engineers with expertise in edge and core switching products and transport gear. As part of the deal, Nortel inked a four-year supply contract and a three-year design services pact with Flextronics.

Proceeds from the sale will be partially offset by transition costs of about $200 million for IT and real estate expenses. But by 2008, Nortel expects the relationship to add $75 million to $100 million to net earnings before tax on an annualize basis.

The large-scale divestiture has been part of Nortel's long-term plan. Smaller moves, like the sale of its directory and operator services business to VoltDelta two weeks ago, have been ongoing.

"We had divested 85 percent [of our manufacturing] over the last five years; this is the last 15 percent," Nortel spokeswoman Tina Warren told internetnews.com.

In another sign of changing times, Nortel has signaled that it's willing to partner with industry rival Cisco .

The Flextronics agreement comes at a good time for new CEO Bill Owens, who is grappling with an accounting mess that chased his predecessor out of the company.

Despite a generally optimistic market outlook, the company had to postpone its annual shareholders meeting last week because a restatement of past quarters' results wasn't ready.

For Flextronics, the purchase enhances an already large footprint. The company has operations in 29 countries on five continents. But more importantly, the Nortel deal adds telecom equipment design and engineering skills to its staff.

"Design is a cornerstone of [our] strategy," Flextronics CEO Michael Marks said in a conference call with analysts. "We want to design, build, ship and service all the products we provide."

Earlier this month, Flextronics bought a 55 percent stake in Hughes Software Systems (HSS), a subsidiary of Hughes Network Systems.

Based in New Delhi, HHS provides 250 telecoms with software to run voice and data networks on a number of optical, wireless, satellite and broadband platforms.



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