TORONTO - Ottawa will be reviewing the sale of Nortel Networks' enterprise division to U.S. telecom equipment giant Avaya Inc. to see if the deal will bring enough economic benefit to Canada.
Speaking Thursday to a group of investors, Industry Minister Tony Clement said Avaya's proposed deal will be subjected to the "net-benefit-to-Canada" test under the Industry Canada Act to ensure the transaction is in the country's best interests.
Last week Nortel announced it would sell the enterprise division to New Jersey-based Avaya for US$900 million and other benefits. The unit makes telecom equipment used by companies, governments and other big customers.
The sale is part of a plan by bankrupt Nortel to sell itself piece by piece to repay creditors.
Despite calling Nortel a "thorny issue," Clement said the review will be fair and follow standard procedures for all reviews carried out when a proposed foreign investment exceeds the book value threshold of $312 million, as is the case with Avaya.
"My officials are already hard at work at amassing the information on the proposed deal and we will commence a dialogue with that company to understand what their intentions are," said Clement.
In such Investment Canada reviews, Ottawa often requires would-be foreign buyers to make commitments on investment, production and jobs in return for approval of the transaction.
While most reviews end up positively, some present problems.
For example, the federal government has taken U.S. Steel Corp. (NYSE:X) to court over what Ottawa says is the American steel producer's failure to meet job commitments it made two years ago when it was allowed to take over the former Stelco Inc. of Hamilton for more than $1 billion.
U.S. Steel shut down most of its Canadian mills in southern Ontario in March because of the North American recession and has only recently begun to bring some workers back.
Earlier this summer, an Investment Canada review prompted Ottawa to hold up a proposed $585 million takeover of Toronto-based uranium explorer Forsys Metals Corp. (TSX:FSY) by an African company.
The deal collapsed and lawsuits have been launched by both companies against each other.
In a major case in 2008, the Canadian government officially blocked the $1.3 billion sale of MacDonald, Dettwiler and Associates Ltd.'s (TSX:MDA) satellite division to U.S. defence contractor Alliant Techsystems of Edina, Minn.
The government said the deal would hurt Canada because it would put control of key satellite technology and information in the hands of a foreign company.
Although Clement remained vague on a timeline for the Avaya transaction review, the minister said he recognized Avaya will be eager to know if the investment meets the government's approval or what changes would be required to push the deal through.
"We are understanding of market forces but at the same time we have to do our due diligence," he said.
Meanwhile Avaya said it looked forward to working with Industry Canada and a review division in the U.S. to finalize the transaction but remained tight-lipped when pressed for details.
"We can't comment on what we expect to hear," said Avaya spokeswoman Lynn Newman adding that the reviews were considered regulatory steps which had to occur.
The privately owned company, which employs about 16,000 people around the world, is targeting a closing date in early December, according to a document on its website.
Avaya also dismissed reports last week that suggested as many as 400 former Nortel employees stood to lose their jobs as part of the proposed sale.
"We're focusing now on retaining as many jobs as possible and we expect to retain a significant number of employees in Canada," said Newman. "It's premature to talk about the specifics."
Newman added that Avaya also expected to maintain Nortel's key eastern Ontario research operations in Belleville and Ottawa.
The enterprise unit currently employs close to 1,000 people in Canada.
Once reviewed, Avaya aims to discuss its targeted portfolio and a road map for the enterprise unit within a month of the transaction closing.
"We're going to provide continuity not only to Avaya customers but to customers of Nortel Enterprises as well," Newman said.
Existing Nortel products will continue to be shipped for a year after the deal is closed, while customer service will also continue for existing products that fall into Avaya's hands.
"It's really all about the customers," Newman said.
Avaya said it hopes to use Nortel to expand its global footprint and ramp up its portfolio in small and medium businesses.
"We're very excited to be brining on Nortel people, their expertise, their product lines and their significant customer relationships," said Newman. "We compliment each other."
Besides the sale to Avaya, Nortel has sold its wireless business to Sweden's LM Ericsson for US$1.13 billion.
Clement said Ottawa did not review the Ericsson deal because the book value of the wireless unit was below the review threshold.
Earlier this week, Nortel also announced plans to sell its last major unit, its Carrier Networks business in an auction.
As Nortel sells its assets, Clement said the breakup of the company should not be seen as a void in the Canadian information technology market.
"I get my dander up a little bit when some people proclaim that the demise of Nortel means the demise of the IT sector in Canada," he said. "Nothing can be further form the truth."