Nortel faces squeeze as key supplier pulls back

TORONTO Tue Jan 20, 2009 3:26pm EST

The Nortel logo is seen outside their head office in Toronto May 6, 2008. REUTERS/Mike Cassese

The Nortel logo is seen outside their head office in Toronto May 6, 2008.

Credit: Reuters/Mike Cassese

TORONTO (Reuters) - Looming changes to the relationship between Nortel Networks Corp NT.TO NT.N and its biggest supplier could tighten the vise on the ailing telecom equipment maker as it tries to restructure in bankruptcy protection.

Flextronics (FLEX.O), a contract manufacturer that supplies about 75 percent of Nortel's finished product around the world, warned last week it is working to reduce its exposure to the Toronto-based company after Nortel filed for court protection from creditors.

As part of reducing that risk, Singapore-based Flextronics has chosen to terminate "certain arrangements" as of July, Nortel announced on January 14, without providing specifics.

Nortel did say it has agreed to buy $120 million of existing inventory from Flextronics by July and to make other quarterly purchases.

Flextronics also revealed it has retained private-equity firm Blackstone Group (BX.N) as an adviser to assist it with how to proceed in the relationship with Nortel.

While it is uncertain what these moves will mean for long-term agreements between the two companies, Nortel has to be very careful about how it treats its biggest supplier while it restructures, said Ed Snyder, principal analyst at Charter Equity Research.

"Nortel is almost totally dependent on Flextronics," he said. "They've got to keep Flextronics relatively happy or they don't have any product any more."

Nortel's options appear restricted: seeking out one or more new suppliers could violate existing agreements it has with Flextronics, or at least cause some tension. As well, it would be very costly -- an issue the cash-conscious Nortel is well aware of.

"Manufacturing product requires a pretty tight link between your engineering and pre-production groups and the actual, large-scale production," Snyder said, adding that Nortel is "in no position financially to woo another supplier."

Nortel filed for protection last week, blaming the global financial crisis for derailing turnaround efforts it started in 2005.

It has about $2.4 billion in cash on hand and analysts expect the company will try to shed assets -- probably at firesale prices -- in a desperate bid to survive.

"Nortel's day-to-day operations are expected to continue without interruption," Nortel spokesman Mohammed Nakhooda reiterated on Tuesday in response to questions about the company's relationship with Flextronics.

"While I cannot comment on this further, our commitment to our customers and to the future of Nortel remains at the forefront of all our decisions."

Flextronics did not return a request for comment.

Nortel shares were down 1 Canadian cent at 9.5 Canadian cents on the Toronto Stock Exchange. In mid-2000, they were worth more than C$1,100 each, adjusted for a stock consolidation that took place in late 2006.

($1=$1.27 Canadian)

(Reporting by Wojtek Dabrowski; editing by Rob Wilson)