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Nortel to Stop Making Its Gear

June 30, 2004|From Reuters

Nortel Networks Corp. will no longer make the telecommunications equipment it sells, announcing a deal Tuesday to contract out its manufacturing work to Singapore-based Flextronics International Ltd.

The deal will see Nortel, North America's biggest telecom equipment provider, net $475 million to $525 million in cash, and Flextronics will oversee manufacturing work that is valued at $2.5 billion annually. The deal extends an existing agreement between the companies.

Flextronics, which has been in talks on the deal with Brampton, Canada-based Nortel since January, will take over Nortel's manufacturing plants in Canada and Brazil and has made an offer to buy plants in France and Northern Ireland.

Shares in Nortel, whose stock has been hit by accounting problems that have lead to financial restatements, gained 25 cents to $4.99 on the New York Stock Exchange.

Flextronics shares rose 61 cents to $15.98 on Nasdaq.

The companies have struck a four-year deal for manufacturing services and a three-year contract for design services.

"It liberates Nortel to really focus on system design work and sales and marketing," said Gabriel Lowy, an analyst at Blaylock & Partners, who has a "buy" on the stock and owns Nortel shares.

"They don't need to have this manufacturing, so there's obviously cost savings."

By the fourth year of the deal, Nortel expects it to add $75 million to $100 million to profit.

Flextronics, which expects to hire 2,500 Nortel employees under the arrangement, will acquire almost all of Nortel's remaining manufacturing operations, including product integration, testing and repair.

Nortel said it would create centers to oversee its supply chains, including customer service, quality assurance and product introduction.

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