Deeply troubled Nortel Networks Corp. is selling manufacturing operations that employ 2,500 people, which could raise about $500 million and create long-term savings for the company as it deals with accounting investigations in the United States and Canada.
The telecommunications equipment maker said Tuesday it is turning over factories in Canada, Brazil, Northern Ireland and France to contract manufacturer Flextronics International Ltd. The sale will leave Nortel with 32,500 employees, down from 95,500 in 2000.
Brampton, Ontario-based Nortel, Canada's biggest technology company, has been on what it describes as a five-year plan to divest its manufacturing operations. It had disclosed the possibility of a deal with Flextronics in January.
Getting out of manufacturing will "enable us to respond with increasing effectiveness to significant ups and downs in market demand and customer needs," said the president of Nortel's global operations, Chahram Bolouri.
Singapore-based Flextronics, which handles the manufacturing for many telecom and computer companies, is paying Nortel $475 million to $525 million for inventory and equipment, plus $200 million for engineering and design assets.
However, Nortel will incur about $200 million in costs related to the transition. That includes potential severance costs for employees, although Nortel spokeswoman Tina Warren said the affected workers "will have the opportunity to work for Flextronics."
The facilities had accounted for $2.5 billion in annual costs for Nortel. Nortel said that within four years, it expects the savings to add $75 million to $100 million to before-tax annual earnings.
Investors reacted favorably, sending Nortel's U.S. shares up 7 cents, 1.5 percent, to $4.81 in early trading on the New York Stock Exchange. Flextronics shares rose 52 cents, 3.4 percent, to $15.89 on the Nasdaq Stock Market.
Facing accounting investigations by Ontario regulators and the U.S. Securities and Exchange Commission, Nortel fired chief executive Frank Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly in April and has said it will restate earnings for the past four years.
The company has indicated that the $732 million profit it initially reported for last year will be cut by half, but losses reported for 2001 and 2002 will be reduced. Nortel said Tuesday it expects to provide "updated assessments" of the restatements in mid- to late July.
However, the company expects to be late in filing 2004 results, and noted that second-quarter figures will not come by August as required by U.S. and Canadian rules. Such reporting delays also could jeopardize a credit facility Nortel has arranged with Canada's export development agency.
The company already has been informed that it has failed to meet Toronto Stock Exchange deadlines for financial reporting, though the exchange has not threatened specific action, according to Nortel.
The sale of the factories affects about 900 Nortel employees in Montreal; 650 in Calgary, Alberta; 380 in Monkstown, Ireland; 330 in Chateaudun, France; 100 in Ottawa and 30 in Campinas, Brazil.