Bankrupt Nortel Networks Inc received U.S. and Canadian court approval on Tuesday to sell its enterprise business, further dismantling the former corporate icon.

Nortel, based in Toronto, said it reached a stalking horse agreement to sell the enterprise business to Avaya Inc for $475 million after considering four potential bids. The unit makes networks for companies,

The Avaya agreement will set the floor for bidding in an auction, approved by a bankruptcy court in Delaware and a court in Ontario during joint hearings linked by video.

Nortel had resolved 10 objections to the proposed bidding procedures, including those from potential bidders, Nortel's lead U.S. attorney said at Tuesday's hearing.

The company filed for bankruptcy protection in Canada and the United States in January, blaming the economic crisis for derailing an effort to turn around what was once the top maker of telephone equipment in North America.

The company said it is selling the enterprise business, which allows customers to combine voice and data needs, because of competition from companies such as Cisco Systems Inc, and because it does not have the resources to maintain the business.

The business needs to be sold to preserve and maximize value for all stakeholders, said Derrick Tay, of Ogilvy Renault, which represents Nortel in Canada. The intricacies of trying to sell this outside of a (bankruptcy) filing were too difficult to achieve.

Nortel's business has been deteriorating during the company's stay in bankruptcy because customers fled when contracts expired, its U.S. attorney, James Bromley of Cleary Gottlieb Steen & Hamilton LLP, said at the hearing.

The proposed asset sale to Avaya will include all the assets of the enterprise business, as well as the shares of Nortel Government Solutions Inc and DiamondWare Ltd.

Bids are due by September 4 for the September 11 auction.

Last month, Nortel auctioned off its wireless business to Ericsson for $1.13 billion after reaching a $650 million stalking-horse bid from Nokia Siemens Networks. The enterprise business sale will leave what was once Canada's most valuable company with its Metro Ethernet Networks unit, which makes Internet infrastructure and includes its optical and carrier ethernet technology.

At Tuesday's hearing, Nortel's attorneys said that the sale of the enterprise business and its approximately 7,800 employees is more complicated than the auction of the wireless business. The wireless business has a few large customers with long-term contracts, while the enterprise business has many contracts that are smaller and cover shorter periods.

Due to the large number of customers and contracts, Nortel plans to sell the business and let the buyer later determine which contracts will be kept.

These procedures are consistent with those employed with success in (the bankruptcies of) GM and Chrysler, and Lehman Brothers last year, said Bromley.

Some suppliers and creditors, as well as the U.S. Department of Justice, had objected to Nortel's plan for the sale. Objections in the course of corporate bankruptcy proceedings come up frequently, and often get resolved outside the courtroom.

Still, Verizon Communications Inc might object at the hearing to approve the sale, said Darryl Laddin, a lawyer at Arnall Golden Gregory LLP, which represents the company.

Verizon depends on the switches and routers supported by Nortel's enterprise business, and Laddin said the company had a significant problem with bid procedures that allow those contracts to be rejected on short notice after a sale.

The case is In re: Nortel Networks Inc, U.S. Bankruptcy Court for the District of Delaware, No. 09-10138.

(Reporting by Tom Hals. Editing by Robert MacMillan)

Canada Electronics