Nortel-NSN deal leaves major wireless assets on the table

Though Nokia Siemens Networks (NYSE:NOK, NYSE:SI) will acquire both Nortel Networks’ (OTC: NRTLQ) biggest wireless business unit and its 4G technology for its $650 million bid, a substantial amount of Nortel’s wireless assets would not be included in the deal. Nortel’s GSM radio and core switching business would remain on the table.

The GSM business is a $1.5 billion-a-year asset, and like the CDMA business—with $2 billion in 2008 revenues—it is still a profitable venture for Nortel. It includes an established customer base of global operators including Vodafone (NYSE:VOD), Orange (NYSE:FTE), T-Mobile (NYSE:DT) and China Unicom (NYSE:CHU) and maintains an installed base of 116,000 GSM cell sites and an even larger footprint of packet core and voice switching gear.

Nortel is selling itself off rather than trying to emerge from bankruptcy as a whole, and its GSM unit, along with its metro Ethernet, VoIP and enterprise groups, is open to offers, said Richard Lowe, president of Carrier Networks for Nortel. While the GSM group could attract a separate bidder, it’s also possible an NSN competitor might offer to buy all of the wireless assets, submitting a single bid for the GSM, CDMA and 4G businesses. As part of its ‘stalking horse’ agreement, NSN would effectively become the initial bidder in an auction supervised by the bankruptcy courts. Another vendor could counter NSN’s $650-million bid with a higher price or a more attractive, but reformulated, proposal.

“Nobody says that a bidder can’t come in with a different offer, essentially reshaping the basket of goods,” Lowe said. “I look forward to an active bidding process.”

While Nortel sold its UMTS business to Alcatel-Lucent in 2006, it kept its UMTS voice and packet core business and maintains a sizable market share despite no longer being a radio supplier. It still sells and maintains its UMTS packet gateway products for former UMTS customers like T-Mobile and Vodafone, and has deployed its GSM/UMTS mobile switching centers (MSCs) with most of its GSM radio customers as well as several customers that don’t use Nortel base stations. AT&T (NYSE:T) built out the voice side of its UMTS core using Nortel’s next-generation MSC despite not awarding Nortel a UMTS radio contract. Today, 60% of AT&T’s converged GSM-UMTS voice network runs on Nortel switches. Nortel even supplies GSM switches to Motorola, which uses them in its iDEN deployments with Sprint and other operators.

Like the CDMA business, GSM is a profitable yet declining business for Nortel. While operators in developing countries are still deploying GSM networks, most of new network investments are now in high-speed packet access (HSPA) upgrades to UMTS or soon in new 4G long-term evolution (LTE) networks. On the core side, networks are evolving to flat IP and IP multimedia subsystem (IMS) architectures that will eventually replace MSCs and serve GPRS support nodes (SGSNs) with session initiation protocol (SIP) servers and IP routers. But Nortel’s core business has a lot more life left in it than the GSM radio business. The large-scale advent of 4G networks is still years away with only a few operators such as Verizon Wireless (NYSE:VZ, NYSE:VOD) and NTT DoCoMo (NYSE:DCM) planning near-term rollouts. Many UMTS operators, including AT&T and T-Mobile, are sticking with HSPA in the interim. AT&T is in the process of doubling its 3G capacity and plans to begin upgrading its network to evolved-HSPA (or HSPA+) by the end of the year.

As long as those UMTS networks are active and growing, operators will need both voice and data core infrastructure to support them, so an operator heavily dependent on Nortel switches like AT&T won’t want to see those products disappear. Even as the industry switches to 4G and its new evolved packet core architecture, operators won’t just flip the off switch on their legacy voice networks. Many vendors predict that operators will offload VoIP traffic on their circuit-switched voice networks for some time.

Nortel also has an evolved packet core solution of its own that wouldn’t be sold to NSN as part of the LTE assets purchase. Nortel could sell that LTE technology to a vendor that has developed no evolved packet core technology of its own. For instance, Motorola has not developed an LTE packet core, choosing instead to resell key gateway components supplied by Starent Networks.

Nortel also has a large share of the GSM rail market, a niche industry served also by Huawei and NSN that optimizes GSM technology for communications between static base-stations and high-speed trains.