Possible Sale Of Avaya Seen As Enabling A More Nimble Company Without 'Anchor' Of Debt

The reported prospect of a sale of Avaya or some of its assets would boost the company's ability to be more nimble in the market, solution providers said, as it could shed the vendor's massive debt.

"They're carrying a huge anchor of billions of dollars in debt that's tied to their ankles," said Joe Rittenhouse, president of business development and managing partner at Crystal Lake, Ill.-based solution provider Converged Technology Professionals. "So how flexible and how quick can you maneuver to be nimble in a market that's changing so quickly? They have to figure a way to get rid of that debt."

In a Reuters report, sources said Avaya's owners -- private equity firms Silver Lake Partners and TPG Capital -- are considering the sale of the unified communications and networking company valued at between $6 billion to $10 billion, including debt. Santa Clara, Calif.-based Avaya was acquired by the pair of equity firms for $8.2 billion in 2007.

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The company has $6 billion in debt, and also needs to raise $600 million for a debt maturity in October 2017.

Avaya declined to comment on whether it is exploring the sale of the company, but confirmed it has retained Goldman Sachs, Centerview Partners and Kirkland & Ellis to assist in "Avaya's assessment of financial alternatives available."

For Avaya's second fiscal quarter of 2016, the company earlier this month reported revenue of $904 million, a decrease of 10 percent year over year. For fiscal year 2015, Avaya generated $4.08 billion in revenue, down from $4.37 billion in 2014.

Partners said the combined effect of vendor consolidation -- such as Mitel's plan to purchase Polycom -- the fast pace of today's market and Avaya's investment shift from hardware to software is forcing the company to make significant changes in how it operates.

"All the communications providers -- it doesn't matter if it's Mitel, Shortel, Polycom, Avaya, Microsoft -- they're all trying to figure out, where can they put the best investment in to be agile for the industry that's changing so fast?" said one top executive from an Avaya Gold partner solution provider, who declined to be named. "These other companies don't have as much debt as Avaya and they're able to adapt and change. ... So something needs to change [with Avaya]. A sale of some proportion is one way for them to go."

One aspect of Avaya's strategy has massive potential -- Avaya's newly formed Zang communications Platform-as-a-Service subsidiary, said Rittenhouse, provided the debt burden is lessened.

"I do think Zang is the future," said Rittenhouse. "That's a smart move in the right direction. They've made some good strategic shifts, but they're carrying an unbelievable amount of debt. It's really hard to be carrying that much debt and moving forward to be proactive in what the industry is doing, and the industry is changing faster than ever before."

Regarding how its channel community would be affected by the potential sale of the company, an Avaya spokesperson said, "We have reached out to partners and customers to reiterate" that the company remains focused on delivering and enhancing its technology offerings.

During its recent earnings call, Avaya CEO Kevin Kennedy said Goldman Sachs is helping Avaya evaluate "expressions of interest" that have been received relative to specific assets, as well as explore other potential strategic opportunities. Avaya's board also approved revisions to executive compensation with a new change-in-control agreement that entitles Kennedy and other top executives to receive bonus compensation upon qualifying termination.

"When they announce that they're looking to bring in firms for strategy, looking to diversify funds or diversify product lines, and they restructure leadership compensation as they did and disclosed -- that's usually a telltale sign that something imminent is likely on the horizon," said Rittenhouse. "I wouldn't be surprised if something happened in the next six months, and that's not necessarily a bad thing."

Last year, Avaya reported that it had more than 300,000 customers, including 95 percent of the Fortune 500 companies, along with more than 9,300 channel partners worldwide.

George Miller, vice president of sales at Integration Partners, a Lexington, Mass.-based solution provider and Avaya's 2015 North American partner of the year, said he is confident Avaya will make a successful transition regardless of any sale.

"Their technologies are awesome, and they have moved to a software-oriented company and regardless of whatever happens, their technologies will live on," said Miller. "Are they going to change? Sure. But the whole industry is changing. ... Avaya has the great leadership team to come out ahead of the pack."