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Alcatel Optronics to be Slashed

A 58% staff cut and two plant selloffs are in the works. What goes, what stays, and will a sale be next?

September 17, 2002

5 Min Read
Alcatel Optronics to be Slashed

Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) is savaging its workforce and facilities in what's become a fight for its life. The news raises pressing questions about what its future will look like -- and whether it will be spent sans parent company Alcatel SA (NYSE: ALA; Paris: CGEP:PA).

Alcatel Optronics plans to cut employees from an already-reduced 1,550 to "below 500" by the end of 2003, in part by selling at least two of its plants (see Alcatel Optronics Cuts Back Hard). The company already cut staff from March 2002 levels of 1,805, making the latest announcement a reduction of nearly 72 percent this year.

The news highlights the ongoing consolidation and overhaul in the optical components market, particularly among companies that are subsidiaries of larger players (see Components Overboard!, Lights Out for Agere's Opto Biz, and Opto Units: Red Tag Sale). Some also wonder what the new, stripped-down Optronics unit will look like, and whether it will be sold.

Alcatel Optronics is a division of Alcatel's Optics business segment, although it has its own tracking stock, started by Alcatel back in the days when an internal component company was a "must have" for optical system vendors (see Component Spinoffs: Dynamite or Duds?).

To see how far Alcatel Optronics has fallen as a result of the telecom boom and bust, one has only to compare last year's second-quarter financials to this year's (see Alcatel Optronics Income Dips). At that time, the company reported revenues of €149.7 million (US$145.49 million). For this year's second quarter, Alcatel Optronics reported revenues of €25.4 million (US$24.6 million), an 83 percent year-over-year decline (see Alcatel Optronics Announces Q2).

Now, Alcatel Optronics says "continuing recession and persistent inventories at the customers' level," could cause revenues to fall to half that figure for the current quarter, bringing it to €12.2 million (US$11.8 million) -- a shocking decline from its past performance.

In today's announcement, the company says it's shooting for a breakeven point of €40 million (US$38.9 million) quarterly, which entails sizeable cuts.

To effect the change, Alcatel Optronics is putting an optical board assembly facility in Plano, Texas, on the market, hoping to sell it to a company that can use the technology in a sector other than telecom. Plans are underway to do the same thing with a plant in Lannion, France, where long-haul and submarine parts were made. Optronics will also close its Canadian operations, which include R&D and a manufacturing plant in Gatineau, Quebec, that is dedicated to fiber Bragg gratings (FBGs).

Alcatel Optronics says its Livingston, Scotland, location will become the headquarters for development and manufacture of passive optical components. That location was headquarters to Kymata Ltd., the components startup Alcatel bought in 2001 for $119 million (see Kymata Sold for $119 Million).

That doesn't mean Livingston won't get its share of restructuring too. Indeed, today's announcement makes it clear that "all Passive products (Planar Lightwave Circuit and FBG) will be consolidated. Operations will continue to be sized to reflect ongoing business conditions."

This may help explain an otherwise puzzling recent online auction in Livingston, Scotland, which includes sufficient gear for anyone to start their own arrayed waveguide (AWG) plant. (Check out Henry Butcher/GoIndustry to see what we mean.)

Alcatel Optronics insists its investment in Kymata remains part of its future direction. "We are not selling Kymata," says Charlotte Laurent-Ottomane, VP of investor relations and communications. "Livingston is highly strategic to our future." She says other companies bought by Alcatel and/or Kymata are no longer represented in Livingston.

Calls to executives in Livingston went unanswered.

With Scotland taking over passives, Alcatel Optronics plans to make its Nozay, France, location the locus of active components. Both units, the company says, will be used to create hybrids incorporating both active and passive parts. Indeed, hybrids have been featured in recent company announcements at trade shows and conferences (see Alcatel Intros Hybrid Combiner).

Alcatel Optronics denies it's stripping down for a possible sale. "We are not for sale today," says Laurent-Ottomane. "We intend to stay in the market as one of the leaders."

But that market is getting smaller and smaller. Indeed, analysts think Alcatel is likely to try to sell its Optronics unit at some point, particularly as its contribution to Alcatel's overall revenue is minuscule at this point. For the second quarter of 2002, for instance, Optronics accounted for 1 percent of the overall revenues of the Optics division, which in turn represented about 46 percent of Alcatel's overall quarterly revenue.

"I'm sure they'd like to sell," says analyst Max Schuetz of Credit Suisse First Boston Corp. The question, he says, is who in the suffering sector would be in a position to buy Optronics from Alcatel?

While more than one analyst thinks JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) will likely be among the only players left in optical components, Schuetz thinks it unlikely they'll buy Optronics or any other company right now. "I think JDSU will consolidate through attrition," he says. They'll wait it out while the competition falls around them, rather than moving actively, he asserts.

Other buyers are said to be on the prowl in the sector, including Bookham Technology plc (Nasdaq: BKHM; London: BHM) and Sumitomo Corp.. Both companies, as a matter of fact, are rumored to have sniffed around the components division of Nortel Networks Corp. (NYSE/Toronto: NT) (see Nortel Close to Components Sale ).

At least one analyst thinks who will buy whom depends in part on the status of parent companies. "Alcatel is Optronics' main customer. You have to ask which company has strength," says analyst Dirk Ruebesamen of European investment bank WestLB Panmure.

— Mary Jander, Senior Editor, Light Reading

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