Granite Hall Partners

Nortel Networks Corp. is selling a business that makes phone systems for offices to Avaya Inc. for $475 million, making its rival the largest supplier of voice-communications equipment as the recession shrinks the market.

The sale of the unit brings to a close months of on-and-off negotiations over the unprofitable division. Some at the Toronto telecom-gear maker once hoped the unit would form the core of a smaller, more focused Nortel when it emerged from bankruptcy-court proceedings.

But hopes of resurfacing as a whole company were dashed when Nortel disclosed in June it would sell its cash engine -- the declining but highly profitable unit that makes a wireless technology called CDMA -- to Nokia Siemens Networks for $650 million. Nokia Siemens Networks is a venture of Nokia Corp. and Siemens AG.

Alternative bids for the CDMA unit are due Tuesday, part of the bankruptcy court's process to see if the assets can fetch a higher price before the court approves the sale. The same process applies to deal with Avaya.

Separately, BlackBerry maker Research in Motion Ltd. disclosed on Monday that it was prepared to bid $1.1 billion for Nortel's wireless assets being auctioned off this week, plus other unspecified assets, but was blocked from doing so.

RIM said in a statement it was told it could bid only if it promised not to bid for other Nortel assets for one year. "Despite repeated efforts, Nortel, its advisors and its court-appointed monitor have rejected RIM's repeated attempts to engage in meaningful discussions," according to the Waterloo, Ontario, company.

Since the June 30 court- approval of the procedures for auction of these assets, Nortel said it has engaged with a number of potential bidders, including RIM. "Other parties moved expeditiously to comply with the court approved procedures to become a qualified bidder," Nortel said in a statement. "It was not until July 15, 2009, that RIM submitted a letter to Nortel asking to be a qualified bidder and since that time, Nortel has diligently attempted to work with RIM on acceptable confidentiality terms relating to Nortel's valuable intellectual property assets, but RIM refused to comply with the court approved procedures. "

One major Nortel bondholder, MatlinPatterson Global Advisers LLC, has said it will submit a plan to restructure Nortel and bring it out of bankruptcy proceedings, to try to raise more money for creditors.

Nortel's chief executive, Mike Zafirovski, said in an interview that he welcomes efforts to maximize the value of Nortel's assets and expects more bids Tuesday. But he bristled at the suggestion made by critics that the bids the company has accepted have failed to maximize return for shareholders. "Talk is cheap," he said.

Nortel has so far accepted bids for its two largest units that total $1.13 billion, valuing the units at less than 40% of last year's sales.

Mr. Zafirovski said selling off Nortel's assets through bankruptcy-court proceedings is the best way to ensure the greatest value for them. "We don't have different objectives than the creditors," he said.

He noted that the company still had $2.5 billion in cash plus working capital of $2.7 billion at the end of the first quarter, and would be selling 3,000 of its 5,000 patents separately.

Avaya is owned by the private equity firms Silver Lake Partners LP and TPG Capital LLP. Nortel had also been in talks with Siemens Enterprise Communications, a joint venture with Siemens that is majority-owned by the private equity firm Gores Group LLC, according to people familiar with the matter.

Avaya had been close to announcing a deal with Nortel numerous times through the spring and summer, but disputes over price, rights to intellectual property and other matters delayed the agreement, said a person close to the matter.

Avaya will also take possession of Nortel's Government Solutions business, which supplies U.S. federal agencies.

Nortel to Sell Office-Phone Unit to Avaya