Who you gonna call? Avaya grabs $500m investment from RingCentral to cut whopping debts

Tie-up greenlit by both boards

Beleaguered telecoms maker Avaya has formed a partnership with relative minnow RingCentral whereby it will become the exclusive supplier of the latter's unified-comms-as-a-service (UCaaS) and get a chunk of investment.

A tie or joint venture between Avaya and the videoconferencing outfit was mooted last month. Avaya had been locked in negotiations with Mitel Network parent Searchlight Capital about a potential reverse takeover.

Avaya – which already sells unified comms and call-centre-as-a-service – will integrate RingCentral's UCaaS into its Cloud Office from Q1 2020. In return, RingCentral gets to expand its customer base from 2 million to the 120 million Avaya sells to.

"The strategic actions that are executing as a result of our comprehensive review create new growth opportunities, return capital to our shareholders and de-lever our balance sheet," said Avaya president and CEO Jim Chirico.

The financial terms will see RingCentral hand $500m to Avaya, including $125m of redeemable preferred equity convertible at $16 per share, equating roughly a 6 per cent stake in Avaya, and it will cough $375m in upfront royalties primarily in stock future payment and certain licensing rights.

For its part, Avaya will buy back $500m of shares and will pay down $250m of debt to free up cash flow.

The transaction is slated to close in the current quarter and does not require approval from shareholders on either side of the fence so has been approved by the companies' boards.

It's been a tough time for Avaya, which only emerged from Chapter 11 in 2017 after its balance sheet was laden with $6bn of debt and $1.4bn of pension liabilities, following its 2007 takeover by Lucent – backed by SilverLake and Texas Pacific – and the subsequent 2009 buy of Nortel.

When it came out of bankruptcy protection two years ago, its liabilities were $4bn.

The tie-up with RingCentral follows industry talk that Avaya was the subject of a takeover bid earlier this year, leading to the review of the business and its strategic options.

Avaya has reported a net profit of $9m for its Q1 (PDF) ended 31 December, a net loss of $13m in its Q2 (PDF) and a whopping net loss of $613m in Q3 (PDF). ®