EXCLUSIVE - With IPO elusive, Avaya explored sale to Oracle this year - sources

By Nicola Leske, Soyoung Kim and Greg Roumeliotis

SAN FRANCISCO/NEW YORK (Reuters) - Avaya Inc's private equity owners explored selling the telecommunications equipment company earlier this year, instead of taking it public, and had talks with Oracle Corp , three people familiar with the matter said this week.

Silver Lake and TPG Capital LP, which took Santa Clara, California-based Avaya private for $8.4 billion in 2007, held discussions with hardware and software giant Oracle in the first half of 2013 about a deal, but the talks fizzled in the last few months, the people said.

Avaya filed for an initial public offering in 2011 but never pulled the trigger, despite very favorable market conditions this year, due to concerns over convincing potential investors about the company's growth prospects.

The efforts to sell the company highlight the challenges facing the private equity firms in cashing out of their investment in Avaya, whose conferencing systems and network gear are in a fierce competitive race with companies such as Cisco Systems Inc and ShoreTel Inc .

Two of the sources said that while Avaya hoped it could revitalize growth to be in a position for an IPO in 2014, the buyout firms faced an uphill struggle to make the company appealing to stock market investors.

The sources asked not to be identified because of the confidential nature of the discussions. Avaya and Oracle did not respond to requests for comment while Silver Lake and TPG declined to comment.

Asked about an IPO, Avaya's corporate treasurer Matt Booher told the Deutsche Bank Leveraged Finance conference this week: "Everyone is very focused on managing the business, and the things we can control in the business to put ourselves in the right position to be in that gate, if you will, or that position."

The company's sales are split roughly equally between products, such as phones and video conferencing devices, and services for the communications networks of companies. It has over 300,000 customers, including more than 95 percent of the Fortune 500 companies.

Avaya reported revenue of $5.17 billion in its fiscal 2012, down 7 percent compared to a year ago, while its earnings on an adjusted basis were flat, as the company struggled to maintain the appeal of its products in a highly competitive market. For the third fiscal quarter of 2013, revenue was $1.15 billion, down 8 percent from the year ago.

Avaya has looked to acquisitions to boost growth. Its biggest under Silver Lake and TPG was the takeover of bankrupt Nortel Networks Corp's enterprise solutions business for $933 million in 2009. Yet most of the improvements in the company's profits have come from operational changes and cost savings.

In its third-quarter earnings call in August, its chief executive, Kevin Kennedy, said that the company's gross margin percentage of 56 percent was the highest for any quarter in Avaya's history.

Avaya had $6.1 billion in debt and $303 million in cash at the end of March 2013. (Editing by Carol Bishopric)

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