Nortel-Avaya deal no match made in heaven: analyst

OTTAWA (Reuters) - It is unlikely that Nortel Networks Corp. (NT.TO: Quote, Profile, Research, Stock Buzz) will buy Avaya Inc. AV.N because there is a poor product fit between the companies and a takeover appears expensive, a TD Newcrest analyst said on Wednesday.

Countering recent speculation about a tie-up between the two communication equipment makers, analyst Chris Umiastowski said the risks could outweigh the rewards.

"We see two potential reasons why Nortel might explore such a combination," he said in a note. "We can think of a lot more than two reasons for Nortel to stay clear."

The obvious allure of a deal is to grow market share, with a combined company leading the business phone market. A merger would also expose Nortel to Avaya's strong services business, he wrote.

But the acquisition of Avaya, long the subject of takeover speculation because of its small size and growing competition for Internet protocol phone systems, would likely be costly.

"Even without a take-out premium, this deal looks like it would be initially quite dilutive to earnings," Umiastowski wrote.

Prior to a run-up in Avaya shares on takeover talk, the stock traded at 19.5 times estimated 2008 earnings per share, versus Nortel at 14.8 times 2008 EPS, he noted.

There is also a risk of customer confusion over future product lines from a merged company, and he said that could dent sales.

A substantial overlap of voice products between the two companies could also impede Nortel's push to generate more data product sales, the analyst wrote.

Finally, Avaya's strong services sales may not be attractive to Nortel. Service revenue made up 46 percent of Avaya's 2006 revenue, but the bulk of that was maintenance work, which may not be sustainable over the long-term, Umiastowski wrote.