Thursday, September 6, 2001 – Print Edition, Page B13
It didn't taking long for Nortel's turnaround plan to start cracking under the strain of its own optimism.
Faced with the obvious, the company took belated and decisive action: It announced this summer that it would scale down to a break-even point of $20-billion (U.S.) in revenue for next year. A pretty theory, until a brutal gang of facts sets in on it.
Telecom capital spending, rather than stabilizing, is tumbling. UBS Warburg sees a 14-per-cent decline next year.
The firm is therefore lowering its revenue target to $18-billion, implying at least a $2-billion deficit.
The cash shortfall will presumably be bigger.
This scenario, if accurate (and judging from the stock price lately, it probably is), means more expensive layoffs, plant closings and so on.
Suddenly, that $6.5-billion in liquidity Nortel has access to (about $3.5-billion in cash, the rest in various forms of potential loans) doesn't seem quite so soothing, which explains why the stock is changing hands at less than $9 (Canadian).
As the shares fall, another round of speculation washes over the market: Will anyone step up and take Nortel out?
It's good fodder for conjecture, but it might not make for rewarding speculation.
A few months ago, Cisco would have been an obvious guess as an acquirer.
It tried and largely failed to become a supplier to blue-chip carriers.
But the company seems to be turning away from telecom to concentrate more on enterprise networking (Juniper might be a logical acquisition for Cisco at this point).
In terms of potential buyers, that leaves a pack of unhealthy dogs: Alcatel, whose shares fell 9.5 per cent yesterday on growth concerns; Marconi, whose shares sank 22 per cent on debt concerns; Ericsson, whose shares lost 15 per cent two days ago -- and a further 10 per cent yesterday -- when it failed to inspire investors with its outlook.
As it continues to slide, it's hard to fathom that Nortel won't be taken out, probably sooner than later.
But besides the fact that any buyer would probably have to use stock, a weak stock at that, Nortel's unwieldy high-fixed-cost structure is likely to weigh on the offer price.
Compaq shares are still tumbling despite Hewlett-Packard's stock takeover offer, which ostensibly comes at a premium.
A similar scenario is likely for Nortel.
Gas fizzing out
Natural gas prices are down about 70 per cent since they hit their highs last winter. The gassier energy stocks are down about 20 per cent.
Investors, of course, never used $12 (U.S.) gas prices in their stock pricing assumptions. But they don't seem to be betting on, say, $2 prices either.
Merger speculation is obviously doing its part to raise the tide for oil patch stocks.
That seems to make sense. Devon may have been somewhat aggressive in its bid for Anderson, but as often happens, the resulting scarcity of properties might light a fire under other growth-oriented U.S. producers.
Fears of being shut out of the Western Canadian basin or the North, given the commonly shared view of the long-term prospects for natural gas, will conceivably create more deals in the oil patch, at multiples that ignore the short-term outlook.
That outlook isn't very friendly.
The latest figures from the American Gas Association show that natural gas storage in the United States has reached roughly 75-per-cent capacity.
The latest weekly injection numbers (new figures should be out today) amounted to 76 billion cubic feet.
That was less than the previous week's 86 billion, but both numbers surprised traders.
To put it in perspective, the total amount of stored natural gas -- at about 2.5 trillion cubic feet -- is 351 billion cubic feet (bcf) higher than it was last year and 165 bcf more that the five-year average for this time of year.
If the supply picture looks bearish, consider also that the economy is weaker than it was last year and that some users have switched from gas to oil or coal.
No wonder investors are so excited about the prospects for takeovers.
Speaking out at HSBC
Brokerages have been doing their best to polish their images lately, imposing various edicts on analysts, promising more scrutiny and erecting thicker walls between their sales and investment banking departments.
HSBC Holdings joined the ranks of the reformers this week, admonishing its analysts to dispense with mealy mouthed jargon and call a sell a sell, if a sell it be.
In an encouraging sign of what can happen when analysts feel free to speak their minds, the firm's own stock watchers wasted no time slapping a "reduce" rating on HSBC stock.
The shares, as it turned out, rose.
vox@globeandmail.ca
Copyright © 2001 Globe Interactive, a division of Bell Globemedia Publishing Inc.
Help & Contact Us | Back to the top of this page |
