Nortel Plugs Away at Broadband

Nortel (NT Quote - Cramer on NT - Stock Picks), it seems, is no longer willing to watch rival Alcatel (ALA Quote - Cramer on ALA - Stock Picks) waltz away with the broadband access market.

The Toronto telecom gearmaker's joint venture deal with China's Huawei, unveiled Wednesday, is expected to put Nortel a huge step closer to one of the hottest markets in networking.

To date, Nortel and phone gear peer Lucent (LU Quote - Cramer on LU - Stock Picks) have largely missed out on the latest round of DSL and fiber optic expansion efforts by Verizon (VZ Quote - Cramer on VZ - Stock Picks) and AT&T (T Quote - Cramer on T - Stock Picks). The telcos are spending billions on network upgrades to deliver advanced digital services like Internet protocol TV as part of a triple play offering to customers.

"This is the sort of bold move people have been looking for from Nortel," says Heavy Reading analyst Scott Clavenna.

But some observers aren't sure if Nortel's partnership with the No. 2 broadband access player is shrewd strategy -- or a desperation pact with an ascendant enemy.

Competitors like Alcatel, Tellabs (TLAB Quote - Cramer on TLAB - Stock Picks) and Huawei, which have acquired or designed Internet protocol-based new line technologies, have taken a big chunk out of the business that was once dominated by old line suppliers like Lucent and Nortel, say analysts.

To oversimplify a bit, Lucent and Nortel have effectively missed out on a major product cycle as telco customers shift to Internet gear, say analysts.

"Nortel is in deeper trouble than people may realize," says Telecom Pragmatics analyst Sam Greenholtz.

Their order volumes look good, but "if you look at what Nortel is selling, it's just a bunch of line cards going into equipment they sold a year or two ago," says Greenholtz.

It isn't obvious now, but in a few years, when the line card orders dry up, it will be apparent, says Greenholtz. "They have lost the big American phone companies like Qwest (Q Quote - Cramer on Q - Stock Picks) and Verizon," he says.

The move to jointly develop an all-purpose network box with Huawei is the first significant product decision by Nortel's new chief Mike Zafirovski, who has been putting his stamp on the big tech shop.

"We expect a lot of fireworks out of Nortel in the first half of 2006," says CIBC World Markets analyst Steve Kamman in a research note. "However, we caution that it will have to correct a lot of past errors so it could be something of a building year."

Nortel also lightened a little of its financial pressure Wednesday by refinancing $1.3 billion in notes due Feb. 15 through a pair of one-year term loans. Nortel said it continues to "pursue important objectives, including the ongoing mediation efforts relating to two of its significant pending class action lawsuits" in the U.S.

Nortel said it continues to evaluate its long-term financing alternatives and "expects to access the capital markets at the appropriate time." The company also says it will file its fourth quarter and annual report but did not give a date.

On Wednesday, Nortel rose 7 cents to $3.07.