Happy Thanksgiving Avaya Debt Holders

by Dave Michels

WSJ reports that Avaya is weighing a chapter 11 bankruptcy and nearing a deal to sell its call-center unit. About frickn’ time.Avaya logo

I am ready for a new Avaya. This current one is too stressed. That’s what comes with RIFs, furloughs, and virtual sales meetings. There’s a great company in there struggling to get out.

There’s been a lot of Avayas. My all time favorite Avaya was Western Electric (1881). Western Electric became part of AT&T. The second T stands for telegraph, but in a settlement with Western Union Ma Bell got a telephone monopoly but had to agree to stay out of the telegraph business.

AT&T produced those wonderful digital PBX’s such as the System 75 right here in Colorado. Kevin Kennedy sold off that building a few years ago. In 1984, after MCI won its landmark trial, AT&T was told to break-up, and what would become Avaya temporarily became AT&T Technologies. In 1996, it was spun off to Lucent, that’s when Avaya opened offices on Lucent Blvd in S. Denver.

It was Lucent that acquired SDX and what became the IP Office platform. But Avaya was always very strong in large enterprise, especially large contact centers. Lucent IPO’d the division in 2000 and christened it Avaya. Its primary competitor at this time was Nortel (previously known as Northern Telecom).

Nortel and others wanted to buy Avaya. Who could blame them? Avaya was printing money. In June 2007 Avaya had a market cap of more than $7 billion including $830 million it held in cash – not to mention zero debt.

In 2007, Avaya was taken private by two private equity companies, TPG Capital and Silver Lake Partners, in a $8.3 billion leveraged buyout (LBO). It was the height of an economic boom fueled by unprecedented fraud in residential housing. The crash of 2008 took out Nortel, which Avaya then partially acquired in 2009 when it purchased Nortel’s Enterprise Solutions business (NES) for nearly $1 billion.

This Avaya was an SMB-enterprise, contact center, UC, data networking, patent rich, behemoth, with a ton of debt. What could possibly go wrong? Everything!  Disruptive technologies, exponential companies, imperfect vision and execution, Microsoft, the iPhone, Christiansen, Cisco, the Internet, Moore, and so many others conspired to cause the firm to today teeter on bankruptcy.

It’s time for a new Avaya. Last May I wrote about how Avaya was considering an Asset sale. In August I offered suggestions. Last September, Beth wrote about how secret negotiations and uncertainty were creating Angst. Last October, Zeus speculated who might buy the networking business. Many assumed Genesys would acquire the contact center business, but that ship sunk when Genesys announced its intent to acquire Interactive Intelligence instead.

Time is running out – what’s it going to be? There’s a few options that seem likely – Bankruptcy -as always – is not the preferred option.

Avaya has a debt balance of about $6 billion and faces a $600 million debt payment in 11 months. In its preliminary quarterly results released last month, the company’s revenue fell to between $945 million and $955 million from about $1 billion in the same time period last year. The company is generating free cash on operations, but its debt service of some $400 million per year pushes it into the red.

The preferred option is the company gets split into separate companies. This is only possible with a debt for equity swap, but this is tricky. If the contact center business was truly valued at $4B (as reported by WSJ), then have just over a $2B gap to cover.

The is hard because it involves splitting and renegotiating liabilities that include combined employee pensions. This is a long term liability in multiple ways – as in it will be scrutinized for years to come.

I believe Avaya is near a deal, but that’s not enough and time is running out. Chapter 11 will create a new set of problems – especially in Europe where it will trigger asset sales to protect the retirement accounts. Avaya may be using the Bankruptcy as a threat (and we all know the risk of threats).

It appears they have a buyer for the contact center business – a buy-out firm called Clayton, Dubiler & Rice (CD&R). WSJ Reports CD&R won the auction, but that no deal is certain yet. I love non binding auctions, had I been invited I would have have bid higher. .

Regardless if it is Chapter 11 or a split up Avaya, it is about to happen – probably in December. It’s also likely the end of the road for this particular Avaya. However, the utterly huge customer base probably isn’t in much risk of abandonment. The enterprise contact center business in particular should be safe.

Oh, by the way, there’s no reason to think TPG and Silver Lake will lose anything on what has become a relatively long term investment. It’s very hard to tell – beyond me. But the firm mostly repackaged the debt to others, plus it’s been collecting management fees all along. For all I know they are the real winners.