Avaya Bouncing Back . . . Maybe

by Dave Michels

It is hard to say when Avaya’s Chapter 11 process started. Was it last January when the company voluntarily started the process? Perhaps last year when it was unable to find a buyer? Was it about eight years ago when it failed to pivot into UCaaS? Many will say it was 2009 when it acquired the enterprise assets of Nortel. Or, perhaps the blame goes to its leveraged buyout back in 2007.

It’s hard to say.

However, this week may be the week that Avaya reversed its trajectory.

What occurred is the bankruptcy court approved Avaya’s disclosure statement and plan support agreement. In other words, the judge said ‘sure, put it to a vote.’

Earlier this month I posted an update on Avaya that explained that it submitted a reorganization plan to the court. Evidently the plan was deemed adequate for a vote. But we kind a knew it would because Avaya had indicated that more than 50% of its first lien debt holders had already agreed to it. Really it would have been a bigger story if the judge rejected it because judge’s don’t normally do much when groups agree. As of this writing, Avaya claims it has also reached agreements with the US Pension Benefit Guaranty Corp and the unsecured creditors committee too.

Agreements are important, but votes are what matter. Who gets to vote? Happy to say not me!  The “impaired creditors” get to vote. These are the creditors that won’t be getting what they are owed. Instead, they are getting partial payment and/or equity in Avaya.

There are a few different groups of impaired creditors. One group, affectionately referred to as the “First Lien Group,” is the group that a majority of which has already accepted the plan. Now the other groups get to express their feelings. As you head down the pecking order, the deal gets less and less attractive.

The voting period starts in September and ends on October 27. A “majority” is defined with debt math that values dollars, seniorities, and lenders. It would be nice if there’s a majority, but something about blood and turnips allows the judge to overrule the vote if deemed appropriate. We will learn the outcome of the vote and the judge’s decision at the confirmation hearing scheduled for November 15. If all goes the way Avaya hopes, the company could be out of Chapter 11 by the end of November.

Assuming November 15 ends with a thumbs-up from the judge, the next big tasks will be the granting and assigning of shares and then creating a new Board of Directors.

Overall, lots of good news from Avaya. Though the company that will exit Chapter 11 is not the same as the company that entered it. The most notable differences are the lack of the Networking division and a different CEO.

[Side note: I don’t understand why the networking division was sold. Sure it made sense if it had enough value to make a dent in the debt, but the division only sold for about $100M (with only 1 bidder).  Avaya networking had been growing, had powered Olympic games and the Superbowl, plus it provides robust Wi-Fi at Avaya Stadium. Extreme Networks expects the division to generate $200 million in annualized revenue. #GoFigure.]

The plan determines who gets paid what. The plan proposes Avaya exiting Chapter 11 with about $3 billion in debt (about half of what it had earlier this year). One of the Avaya Pension Plans transfers to PBGC and will still be honored by Avaya.

The other drama to track is for Avaya to become a publicly listed company.  Avaya intends to go public in conjunction with ending its chapter 11 saga. The quickest path is to an OTC exchange, but the stated goal is to get to the NYSE or NASDAQ (probably next year). If you are going to force debt holders to be shareholders, the civilized thing to do is provide a path to liquidity.

Other things to note:

  • Avaya continues to be profitable with positive cash flow.
  • Software and services is at 79% of revenue, and recurring revenue is now up to 58%.
  • Revenue has steadily decreased since 2006, but operating income has mostly risen. Both are partially explained by a shift away from hardware. EBITDA has been steady since about 2011.
  • The debt holders getting stock will own over 90% of the company. The current shareholders (TPG and SilverLake) will be former shareholders and get nothing.

Avaya has been very quiet about its road map this year. Especially its next generation contact center. I can say that it represents a significant change in approach and technology, and has progressed to limited customer trials. I expect it to become the dominant topic of interest regarding Avaya next year.

The fat lady hasn’t sung yet, but Brunnhilde is in the house.