• Debt overhang from the purchase of hardware business in 2009
• Caught out by the speedy move to software and cloud
• Debt maturing, cash required, so Chapter 11 a temporary measure

Enterprise equipment vendor, Avaya, has filed for Chapter 11 bankruptcy protection in the US. Avaya says its foreign affiliates are not included in the filings and will continue with their normal operations.

Avaya offers a broad customer premises portfolio of comms solutions, from contact centre and unified communications integrating voice, video, data, messaging.  In its own words, it offers these functions “on premises, in the cloud, or as a hybrid”.

Given that, Avaya might be fairly said to be journeying between the old hardware-focussed world of physical CPE, with its long churn times, maintenance and support contracts, expensive upgrades and so on, to the sunlit uplands of the equivalent software-as-a-service, cloud-based offerings.

Having to fund debt from the purchase of part of its hardware business while straining to move into software seems to be the root of the problem for Avaya and it decided it needed a radical move to kick a new  financial structure into place. It decided to seek Chapter 11 protection to do it.

Chapter 11 (in the US bankruptcy code) allows a court to grant a company relief from its creditors for a period so that it can restructure, raise extra funds or sell off bits of itself and thus be in a position to keep trading and eventually pay off its debts. The downside risk, of course, is that the company will keep burning through its cash with no turnaround in sight and - when it is eventually liquidated - will have even less dosh in the kitty for its creditors than it had before.

Naturally companies are reluctant to apply for Chapter 11 unless they really have to, which means that Avaya must have found itself in a tight fiscal corner. In its statement to accompany the filing, it says its problem can be attributed to an ‘old’ capital structure which now needs a radical refresh.

“Avaya’s current capital structure is over 10 years old and was put in place to support our business model as a hardware-focused company, which has evolved significantly since that time,” said Kevin Kennedy, Chief Executive Officer of Avaya. “Now, as a result of the terms of Avaya’s debt obligations and the upcoming debt maturities, we need to recapitalize….  Our business is performing well, and we are confident that we can emerge from this process stronger than ever. Pursuing restructuring through chapter 11 will enable us to reduce Avaya’s debt and interest expense, while providing increased financial flexibility.”

Avaya says it has obtained $725 million in new financing from Citibank  to see it through Chapter 11 process.

The Avaya hardware story goes back to Nortel (Northern Telecom) a Canadian telecoms equipment vendor which soared in value through the 1980s and 1990s, only to find itself on the rocks at the turn of the century (as so many did). Nortel had over-reached and, on the way down, was embroiled in accusations of accounting fraud and double-dealing. As we observed later in that decade:

“The scale of Nortel's collapse can still surprise. In 2001 the company was worth $3.3 billion, a year later it was just $37 million. Nortel lost more than $3.6 billion in 2002 but, unexpectedly, reported an operating profit for Q1, 2003.”

Avaya’s current woes seem in part a result of its $900 million acquisition of Nortel’s enterprise network equipment business in 2009 which it saw as a way to flesh out its hardware offering.

Unfortunately, the telecoms world has turned to software and the cloud more quickly this decade than the strategists probably envisaged eight years ago, and that’s had a detrimental effect on Avaya’s numbers and, consequently, on its ability to service the fast-maturing debt. To cover that, it first looked at the possibility of selling off its contact centre business to get some cash in the bank, but then decided that didn’t look like such a good idea.  

The Chapter 11 move, and the accompanying $725 million cash facility, is designed to see Avaya through the process of selling off another chunk of its business to balance the books. 

To give a flavour of the sort of business Avaya is in, its announcements over the last four months have included:

• signed a strategic agreement with China’s Tencent Cloud, a leading global cloud service provider, to help enterprise customers launch cloud-based communications services.  
• Provided maritime services company, Groupo Transcoma, with the with the Avaya IP Office Platform, first in the Barcelona HQ, then rolled out to its 26 global offices
• Provided its Avaya Scopia videoconferencing to connect medical sites for For St. Josefs Hospital Wiesbaden GmbH.

See the all the notable events for Avaya on its TelecomTV Tracker timeline HERE