Unefon, Nortel end legal dispute

Mexico's number four mobile operator Unefon has reached a deal with its supplier Nortel Networks (NYSE: NT) whereby Unefon gets to reduce and restructure its US$368mn debts with Nortel in exchange for ending an ongoing lawsuit against the vendor, Unefon said in a statement to the Mexican stock exchange. The two companies had been locked in a bitter dispute since last year after Unefon sued Nortel for US$900mn in damages for allegedly failing to deliver equipment. Under the terms of Monday's agreement, Unefon paid Nortel US$43mn straight up and the remaining US$325mn debt was sold to a group of private investors, with the terms extended to 2013. The financing package's amortization schedule originally called for a US$35mn payment in 2003, US$68mn in 2004 and US$248mn in 2005. The companies did not restructure the interest rate associated to the debt, which is 12.78% according to Unefon financial statements. The companies also signed a five-year supply contract, valued at 20mn-40mn pesos/year on capex, depending on market conditions. "The terms of the supply contract are more consistent with current market offerings than the one that Unefon signed with Nortel Networks in 1999," the statement said. "Looked at as a whole, these agreements give Unefon new access to a technology provider and a viable capital structure," Unefon chairman Moises Saba said in the statement. Pyramid Research analyst Gabriela Baez told BNamericas the agreement will free Unefon to focus again on growth. The legal stalemate distracted the company from focusing on expansion plans, she said. Baez doubted that the agreement will now lead Unefon minority parent TV Azteca (NYSE: TZA) to resume its spinoff of the mobile operator. TV Azteca began the spinoff operation last year, but put it on hold after Unefon filed its US$900mn lawsuit against Nortel. "The possibility that TV Azteca's own cash flow will be diverted to support Unefon has been greatly reduced," now that Unefon has an improved debt structure, she said, adding that TV Azteca would not likely get much out of a Unefon spinoff, given the still poor attractiveness of telecoms stocks. Baez said the timing Unefon-Nortel agreement probably has little to do with the recent news that Azteca chairman Ricardo Salinas will purchase Mexico's number three mobile operator Iusacell. The agreement does not represent a quick cleanup of Unefon's balance sheet so that it may absorb the debt-laden Iusacell, she said, adding that the two companies will likely remain separate operating entities over the long-term. "The Salinas Group is not a financial holding company, but a group of companies with overlapping board directors," Baez explained. As a result Salinas is not well structured to absorb Iusacell's debts and give Unefon only its assets. By using the paging company Movil@ccess, Salinas gets Iusacell without hurting Unefon, she said. Iusacell has US$815mn in total indebtedness. According to Baez, Iusacell will probably see its market share diminish further under the new ownership, and will migrate more solidly into the high-end and corporate niche. Meanwhile, Unefon will continue to focus on the mass-market. There will be some overlap, of course, but not much, she said. Unefon ended the quarter with more than 1.5 million customers, up 58% from the same period in 2002. The company saw its net loss widen 11% to 102mn pesos (US$9.5mn today) in the first quarter, from 91.3mn pesos in 1Q02 due to financing costs of 175mn pesos. Unefon's major shareholders are the Saba family and the TV Azteca (NYSE: TZA) group owned by Salinas. Last week, Salinas announced that he would pay US$10mn to acquire Iusacell (NYSE: CEL).