Nortel Networks sells manufacturing operations to Flextronics

June 29, 2004 Toronto--Nortel Networks has reached an agreement with Flextronics regarding the divestiture of certain Nortel Networks manufacturing operations and related activities in Canada and Brazil. It is also anticipated that Flextronics will acquire Nortel Networks manufacturing operations in France and Northern Ireland, subject to the completion of the required information and consultation process.

Jun 29th, 2004

June 29, 2004 Toronto--Nortel Networks has reached an agreement with Flextronics regarding the divestiture of certain Nortel Networks manufacturing operations and related activities in Canada and Brazil. It is also anticipated that Flextronics will acquire Nortel Networks manufacturing operations in France and Northern Ireland, subject to the completion of the required information and consultation process. These operations and activities have been the subject of discussions between the two companies since Nortel Networks announced in January 2004 that it was in discussions with Flextronics.

"With today's announcement, we have completed our five-year plan to divest substantially all of our manufacturing activities to world-class electronics manufacturing services companies ¿ a supply chain strategy that has provided, and is expected to continue to provide, significant benefits to Nortel Networks," said Chahram Bolouri, president, Global Operations, Nortel Networks. "We have been able to lower our cost of sales, reduce our fixed-cost infrastructure, and significantly reduce inventory levels and associated carrying costs.

"Most importantly, this strategy will continue to enable us to respond with increasing effectiveness to significant ups and downs in market demand and customer needs," Bolouri said. "That, together with the other benefits, has been critical in today's highly competitive global telecommunications industry. Today's announcement is consistent with Nortel Networks commitment to having one of the industry's most efficient and responsive business operations."

Under the terms of the agreement, Flextronics will acquire substantially all of Nortel Networks remaining manufacturing operations, including product integration, testing and repair operations carried out in the Nortel Networks Systems Houses in Calgary and Montreal (Canada) and Campinas (Brazil), and will also acquire certain activities related to these locations, including the management of the supply chain, related suppliers and third-party logistics. In Europe, Flextronics has made an offer to purchase similar operations at the Nortel Networks Monkstown (Northern Ireland) and Chateaudun (France) Systems Houses, and, as required by law, this offer will be subject to completion of appropriate information and consultation processes with the relevant employee representatives.

Flextronics would also acquire Nortel Networks global repair services, as well as certain design assets in Ottawa and Monkstown related to hardware and embedded software design, and related product verification for certain established optical products. These design assets are being coupled with the manufacturing operations that are being divested so as to enable faster product cost reduction and improved time-to-market for new features that further leverage the lifecycle of these successful established optical products. This, in turn, will enable Nortel Networks to focus on next generation optical architectures, products and solutions ¿ areas where Nortel Networks believes it can gain the most competitive advantage.

Upon the successful completion of the agreement and offer, Nortel Networks expects to realize even further benefits from its divestiture strategy, including:
• Moving towards a 100% variable cost structure for manufacturing, which leads all of Nortel Networks major competitors and which will provide even greater operational and financial agility;
• Estimated proceeds of approximately US$675¿US$725 million in cash payments to be received in the fourth quarter of 2004 and during 2005 which is comprised of approximately US$475¿US$525 million for inventory and equipment, dependent on the asset value at closing, and US$200 million for intangible assets relating to the design and engineering transfer. These cash payments would be offset by related estimated transaction costs (including transition, potential severance, information technology implementation and real estate costs) of approximately US$200 million;
• An increase in inventory management efficiency moving toward best in class; and
• By year four, targeting US$75-US$100 million positive impact on net earnings before tax on an annualized basis which includes savings from related internal efficiencies expected to be realized.

As part of the agreement, both companies would also enter into a four-year supply agreement for manufacturing services (whereby Flextronics will manage approximately US$2.5 billion of Nortel Networks annual cost of sales) and a three-year supply agreement for design services.

"By divesting our manufacturing activities to companies whose core competency lies in this area, we have been able to focus our supply chain resources and investments on those areas of the business where we believe we can gain the greatest competitive differentiation," Bolouri said. "Going forward, these areas will include the introduction of new products and the deployment, network integration and support of complex, multi-technology network solutions."

In line with this direction, Nortel Networks also announced today that it will create Solutions Operations Centers in Calgary and Montreal and, pending the completion of information and consultation processes in Europe, in Monkstown and Chateaudun. These Centers will have overall responsibility for the strategic management and control of Nortel Networks various supply chains, including all customer interfaces, customer service, order management, quality assurance, product cost management, new product introduction, and network solutions integration, testing and fulfillment.

"We couldn't be more pleased to be entering into an even larger transaction with one of the world's leading telecommunications providers," said Michael Marks, chief executive officer, Flextronics. "The Nortel Networks manufacturing and design people who work within these activities bring intimate knowledge and experience with complex, carrier-grade-quality products and processes. This know-how and capability is absolutely critical to the future of Flextronics."

"We are excited about expanding our relationship with Flextronics, and about the competitive advantages this relationship will bring to Nortel Networks," Bolouri said. "We believe that Flextronics has the necessary vertical supply chain expertise, resources, and global presence to meet our time-to-market, quality, and product cost-reduction objectives and to take our supply chain to new levels of performance and competitive differentiation."

Under the terms announced today, it is also intended that approximately 2,500 employees would transfer to Flextronics. Of those employees, approximately 900 in Montreal, 650 in Calgary, 100 in Ottawa and 30 in Campinas will transfer to Flextronics. Under the terms proposed in Europe, approximately 440 in Monkstown (including approximately 55 designers) and 330 in France would transfer.

The portion of the transaction related to the manufacturing activities in Montreal and the optical design activities in Ottawa and Monkstown are expected to close in the fourth quarter of 2004. The balance of the transaction is expected to close in the first half of 2005. This phased closing will allow the time necessary for both companies to implement all systems and processes to ensure a smooth transition without adverse impact to either business. The discussions and closing date expectations are subject to the completion of the required information and consultation processes. All transactions are also subject to customary conditions and regulatory approvals.

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