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Avaya files for bankruptcy

Decade-old capital structure needs a refresh for cloudier times

Avaya has filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code, which allows organisations to re-organise their affairs in part by temporarily relieving them of obligations to creditors.

The company's canned statement positions the decision to seek Chapter 11's protections as a necessary refresh of arrangements made a decade ago. Avaya went private in 2007 when private equiteers Silver Lake Partners and the Texas Pacific Group splashed US$8.2bn on the company.

At the time the new owners said going private would help Avaya to accelerate product development, helped in part by the $900m acquisition of Nortel Enterprise Solutions in 2009. That acquisition added ethernet switching and VoIP code to Avaya's portfolio.

But while that Avaya digested Nortel the world started to shift towards software-as-a-service and cloud for voice services. The company made plenty of strides in that direction, but so did Cisco, Microsoft and others. And those rivals weren't paying off debts that Avaya's found harder and harder to service. In coming months the company has some big payments to make leading it to consider selling its contact centre products to Genesys in 2016, in the hope it would raise a nice lump of cash.

But that plan didn't come to fruition and the company's now decided to seek Chapter 11 protections, for the reasons outlined in the following explanation from CEO Kevin Kennedy:

This is a critical step in our ongoing transformation to a successful software and services business. 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. Now, as a result of the terms of Avaya’s debt obligations and the upcoming debt maturities, we need to recapitalize the Company.

Kennedy also says that the company has decided that it will keep the contact centre business, as doing so will be best for Avaya in the long run. The company “remains in ongoing negotiations to monetize certain other assets”.

The company's received a big vote of confidence for the move from Citibank, which underwritten a $725 million financing facility to help the company through the re-jigging of its finances. \

There's also good news in the company's financials, also announced today, which revealed quarterly revenue of $958m and annual revenue of $3,702 million. The Q4 number was pleasant, inasmuch as it topped forecasts, but there was also a $542m write-down of goodwill that tipped the company into a $428m loss. The company blames “lower demand for unified communications hardware” for its current problems. The whole-year number was down down 9 per cent compared to 2015's figure.

On the upside, the company can point to services and software revenue growing from 71.3 per cent in 2015 to 74.9 in 2016. It also has fat margins over 60 per cent.

Avaya will operate as usual during the Chapter 11 process. Kennedy hasn't outlined how long the restructuring is expected to take, but financial media are suggesting a quick, 45-to-60-day, transition to new arrangements.

Chapter 11 only impacts Avaya's United States operations. In the rest of the world the company is moving to assure customers and stakeholders that it's business as usual.

Avaya Australia/new Zealand, for example, has told us it "closed fiscal 2016 with its strongest quarter in 12 quarters."

"This result mirrors international performance, with global revenue reaching US$958 million, up US$76m from the previous quarter, and EBITDA increasing by 25.3 per cent to US$223m in the same period."

"Avaya A/NZ’s position is the outcomes of several significant agreements with organisations including (but not limited to) major government departments and tier 1 banks, and continues to work closely with partners to deliver on market demands. Under the continued leadership of Peter Chidiac – who was appointed Managing Director in August 2016 – Avaya A/NZ is in on track for 2017 with a strong pipeline supplementing existing momentum." ®

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