The Canadian-based telecommunications equipment firm will officially break its ties with BCE, the parent of the country's dominant phone company, Bell Canada. BCE currently owns approximately 40 percent of outstanding shares in Nortel.
Nortel shareholders approved the plan today; BCE shareholders approved the plans yesterday.
"This is important to make them look like Lucent and Cisco. It provides Nortel with an equivalent financial structure and complete independence," said analyst Benn Mikula, of RBC Dominion Securities. "Any potential conflict of interest with its association with BCE are removed."
Releasing the shares on the open market will likely bring more stability to Nortel's stock performance and could also rid Nortel of nagging conflict-of-interest concerns, because Bell Canada is 20-percent owned by Nortel customer SBC Communications, according to analysts.
It also marks a significant moment in Nortel's evolution, because the company has shed much of its roots as a slow-moving telecommunications equipment provider to become a fast-paced player in the Internet technology era, as evidenced by the company's recent earnings. The company is in a heated battle for customers vs. the likes of Cisco Systems and Lucent Technologies.
Because of the SBC relationship, Nortel could be perceived as giving favorable treatment to SBC over another customer, said Mikula.
Over the long term, analyst John Wilson, of Warburg Dillon Reed, said Nortel's independence will also make the company more attractive to U.S. mutual funds that currently invest more in other communications equipment firms, such as Cisco and Lucent.
"In terms of share ownership by many large U.S. funds, Nortel to a large extent has been underweighed, and a large reason is Nortel is not considered a widely held stock because it's owned by BCE," Wilson said. "But with that block removed now, and it's more widely held?we think that has implications."
When the shares are issued next week, Wilson expects most investors will keep their shares of Nortel, but the company's stock price could dip slightly if some investors sell their shares to ensure their stock portfolio is diversified.
"BCE's shares are mostly held by Canadians. It's a favorite stock for many, but they're limited to how much they can own," Wilson said. "They want to be diversified and not have 30 percent of their money in one company's stock, so in the near term, some will be sold and that could put pressure on the stock (price)."
Nortel's spinoff from BCE is similar to a plan by AT&T consummated in 1996 to break out its equipment business as Lucent Technologies.
As a result of the move, Nortel will become the most widely held stock in Canada, according to executives. Nortel chief executive said the break from BCE and resulting float of shares "makes us more stable" and will allow big investors to move in and out of the stock, because a greater percentage of the 1.37 billion outstanding shares will be available to trade.
"It makes Nortel more attractive," Roth said.
The timing of the spinoff from BCE will coincide with a previously announced stock split for the company, for shareholders on record as of May 5. The stocks will start trading on the Toronto Stock Exchange on May 3 and on the New York Stock Exchange on May 9, a company spokesman said.