Avaya & Nortel Stalking Horse Agreement: What Does it Mean?Avaya & Nortel Stalking Horse Agreement: What Does it Mean?

Siemens/Gores Group is still not out of the picture.

Today's announcement that Nortel has entered into a "stalking horse" asset and share sale agreement with Avaya Inc. for US$475 million may be viewed as a change of earthquake proportions in the competitive landscape of the enterprise communications market. The "stalking horse" agreement--for Nortel's North American, CALA and Asia Enterprise Solutions business, and an asset sale agreement with Avaya for the EMEA portion of its Enterprise Solutions business and as well as the shares of Nortel Government Solutions and DiamondWare, Ltd.--does not mean that Avaya and Nortel ES will definitely merge, but is only the first step in the process.According to the Avaya press release, the transaction is subject to a competitive bidding process and requires the approval of the United States Bankruptcy Court for the District of Delaware and the Ontario Superior Court of Justice. Avaya expects that hearings before those courts to approve bidding procedures will be held within the next couple of weeks, followed by an auction, with hearings for approval of the ultimate sale to be held thereafter. The press release further goes on to say that in EMEA, Avaya has entered into an agreement with the Joint Administrators, on behalf of the EMEA entities for which they have been appointed, and the transaction is subject to information and consultation with employee representatives and approval of the courts in France and Israel. The transaction is also subject to customary closing conditions, including receipt of necessary regulatory approvals.

Section 363, Chapter 11 Bankruptcy regulations would designate Avaya as an initial bidder, known as a "stalking horse," who reaches an agreement to purchase assets from the chapter 11 debtor, Nortel. The buyer and the debtor in possession ("DIP") negotiate an asset purchase agreement ("APA") which rewards the stalking horse for investing the effort and expense to sign a transaction that will be exposed to "higher and better" bids. There are protections afforded to Avaya as a stalking horse that could include a combination of a break-up fee between 1% and 5% of the sale price, expense reimbursement up to a negotiated cap, minimum increments for overbids, qualification requirements for competing bidders, strict deadlines for competing bids and dates for the run-off auction, final court approval and closing.

Siemens/Gores Group is still not out of the picture. The Siemens internal message issued to employees does not cede Nortel ES to Avaya, leaving open the possibility it could still outbid Avaya.Siemens/Gores Group is still not out of the picture.