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Nortel agrees to outsource manufacturing

Company will hand over most of its manufacturing operations and 2,500 employees to Flextronics as it continues to cut costs.

Troubled telecom equipment maker Nortel Networks has agreed to outsource most of its manufacturing in a deal worth between $675 million and $725 million.

Under the agreement, announced Tuesday, electronics manufacturer Flextronics will handle the majority of Nortel's optical, wireless and enterprise manufacturing operations as well as the company's optical design operations.

Nortel had announced in January that the two companies were in talks.

After the deal closes, Flextronics will assume most of Nortel's systems integration activities, final assembly, testing and repair operations. Flextronics, based in Singapore, also will manage Nortel's supply chain and suppliers.

Flextronics will pay roughly $75 million to Nortel in the fourth quarter of 2004. It will then make payments of approximately $600 million to $650 million over four quarters in 2005. The agreement between the two companies will span four years.

Nortel has been aggressive in its outsourcing strategy for at least the past five years. It has already divested much of its manufacturing to Flextronics and other suppliers of electronic manufacturing services. Most of its manufacturing, product integration, configuration and testing of its DMS circuit-switching products in Raleigh, N.C., were handed over to outsourcers three years ago.

"Today's announcement is an important part of Nortel Networks' strategy," Chahram Bolouri, president of global operations for Nortel, said in a statement. "By leveraging the vertically integrated supply chain capabilities of Flextronics, we can focus our resources and efforts on those areas that offer us greater competitive differentiation."

As part of the agreement, about 2,500 employees from Nortel will move over to Flextronics. The business transfer to Flextronics is expected to begin in November 2004 and will take approximately six months to complete. Flextronics expects annual revenue from the deal to reach about $2.5 billion.

Nortel's accounting practices are currently being investigated by Canadian and U.S. officials. Formal investigations were prompted in March, when the company restated earnings for the second time since November. In April, the company fired former CEO Frank Dunn and two other executives as part of the fallout of the accounting scandal. It is also now the focus of a criminal investigation in Texas. Nortel has not completed its own internal audits and has not provided final financial results for the past six quarters.

In the company's biweekly update to the Ontario Securities Commission on Tuesday, Nortel set a timeline for completing its restatements. It said it will provide an update on financials from 2003 and the first quarter of 2004 in mid- to late July. By mid-August, the company expects to release preliminary unaudited results for the first and second quarters of 2004. Final audits for 2003 and the first two quarters of 2004 are expected in the third quarter of 2004.

"Putting a solid timeframe for the important financial restatements for 2003 and the first half of 2004 is important and removes some of the uncertainty but far from all of it," Lehman Brothers analysts Tim Luke and Steven Levy wrote in a research note. "We still do not know what the impact of these restatements is and how profitable Nortel really was during the last six quarters. This remains the key question that needs to be answered before any investor can make a rational decision whether to buy, sell or hold NT shares."