After Bloomberg reported last week that Mitel Networks Corp. was preparing to file for Chapter 11, today the telecommunications company announced has done so, entering into an agreement with its senior lenders to optimize its capital structure and recapitalize its debt.
In 2018, Searchlight Capital Partners took Mitel private and has been the majority shareholder since then. With this week’s financial transaction, Mitel has entered into an agreement with an Ad Hoc Group of its senior lenders, junior lenders and other stakeholders to put a new ownership structure in place, ending Searchlight’s ownership of Mitel.
To execute the restructuring, Mitel will employ a prepackaged plan and file voluntary petitions seeking debt relief under Chapter 11 of the Bankruptcy Code. Historically, Chapter 11 restructuring was a long, drawn-out process that could put a lengthy pause on company operations until the proceeding was complete.
Over the past few years, both Avaya and C1 (formerly ConvergeOne) have used this process to enter and exit Chapter 11 with virtually no interruption to their business process. In Mitel’s case, there is no impact to customers, partners or employees, and they expect to complete the process in 60 to 90 days.
Once the financial transaction is complete, Mitel’s debt will be reduced significantly. The company has received a commitment for $60 million of new-money debtor-in-possession or DIP financing from some of the lenders to support the business through the restructuring process. Once approved by the court, the DIP financing and Mitel’s existing working capital will fund the day-to-day operations during the Chapter 11 process. Mitel has also received a commitment of $64.5 million of new exit financing when the plan is consummated. The new debt will be used to support its continued go-forward operations.
Success post-restructuring depends on several factors. This is akin to an individual filing for bankruptcy. If the person has a high-income paying job but is riddled with credit card debt, clearing the payment obligations sets the person up well for the future. If the person has no job, is unemployable and a high-debt load, corrective action, such as going to college, before filing for bankruptcy is necessary to ensure success.
With the previously mentioned examples, Avaya went through Chapter 11 under Chief Executive Alan Masarek, but the company structurally still had its challenges. Since then, it replaced him as CEO and new head honcho, Patrick Dennis, seems to have a cogent strategy in place focusing on the Global 1500.
C1 was in a similar position to where Mitel is today and is a great example of how this process can work. In April 2024, the company went through a similar restructuring and cut about $1.4 billion in debt. The systems integrator had gone on a buying spree and acquired several smaller value-added resellers and system integrators to create the large company we know today. Despite the high cash flow, debt was holding it back and since it went through its Chapter 11 process, the company has been much stronger and able to serve its customers better.
Mitel’s business operations are currently strong and have seen a resurgence as its hybrid cloud strategy takes hold. The challenge has been servicing the debt, particularly at these high interest rates that left the company little capital to work with. This process will result in Mitel’s balance sheet being deleveraged by approximately $1.15 billion and its annual cash interest payments to be reduced by $135 million.
For Mitel, the timing of this is right. The company has a strong product roadmap in place. It has built a hybrid cloud portfolio and has partnerships with the likes of Zoom and Genesys for customers that want a SaaS delivered offering. Though the trend for unified communications and contact center has been to move to the cloud, there is still strong demand of on-premises solutions.
And with Avaya bailing on the mid-market and focusing only on large customers, it leaves Mitel as the only provider of on-premises/hybrid cloud solutions for the midmarket, giving it a huge base of customers to go after. It’s worth noting that Mitel has evolved its portfolio to serve the needs of global companies but given the lack of competition in midmarket, that is the company’s-low hanging fruit.
Also, because of many of the global macro issues like security and outages, along with the potential of artificial intelligence, there has been a rebirth of interest in hybrid cloud solutions validating the strategy the company put in place two years ago. If Mitel wants to create channel incentives, offer customers buybacks or other strategies to go after these customers, it needed the capital and now it has access to more as much of their debt has been eliminated.
I had a chance to talk with Mitel CEO Tarun Loomba about the restructuring. “This is something we’ve been working on for a while,” he said. “We knew we had to address our capital structure to set ourselves up for long-term success. This is a proactive step that allows us to invest in the business, continue innovating and support our customers’ and partners’ evolving needs for secure, reliable communications solutions without missing a beat.”
Loomba further shared that Mitel’s strategy is to lead the hybrid communications market by leveraging their significant customer base and incumbency advantage, attract new customers with innovative hybrid solutions and services, and, as this announcement demonstrates, strengthen its core business to drive profitable and predictable growth.
For Mitel customers, this should be viewed as good news. Companies that continue to use Mitel do so because they have embraced the private, hybrid cloud model for communications. With a bigger focus on AI, security and compliance, there may have been some question as to whether Mitel had the resources to invest in its platform to ensure customers were getting the latest AI capabilities with the necessary security and guardrails. This also gives Avaya customers that wish to stay on-premises or use a hybrid model a viable option to migrate to as they continue to shift all resources to the G1500.
There have been many rumors regarding Mitel’s future and the restructuring indicates it’s here to stay for the foreseeable future. After the acquisition of Unify (former Siemens Enterprise) the company has about 20% share in UC seats globally, and with this financial reset, it can be more aggressive in growing its share.
These decisions are never easy, but for Mitel, this was the right decision to make. AI is acting as an accelerant to innovation and change in UC/CC, and being hampered by debt was only going to hold it back. This is the right move to take control of its future and come out stronger on the other side.
