Alcatel: What's Next?

Alcatel's had a busy week so far. And it isn't finished with its business in Murray Hill just yet, sources say

May 30, 2001

5 Min Read
Alcatel: What's Next?

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) can't stay out of the headlines this week. Even as merger talks with Lucent Technologies Inc. (NYSE: LU) collapsed, Alcatel was readying a burst of financial news and reportedly telling analysts it may yet buy Lucent's fiber business.

"They won't say so publicly, but privately Alcatel has stated that they're still talking to Lucent about buying the fiber business," says a European investment banker, who asked that his name and affiliation be withheld.

This morning, Alcatel's CEO Serge Tchuruk told analysts and press in a conference call that he could not comment on any of his company's dealings with Lucent, although "I'd like to."

For its part, Lucent confirms that it's still entertaining bids for its Norcross, Ga.-based Optical Fiber Solutions Group. But spokeswoman Michelle Davidson declined to confirm who the bidders were or to say whether Alcatel's among them.

Initially, Alcatel's bid on Lucent's fiber group -- confirmed by Tchuruk without a specified amount -- was the instigator of talks between the two companies. Those talks escalated into an attempt at a full-out merger, then collapsed yesterday (see Alcatel, Lucent Throw in the Towel).

But after this week's events, analysts say they're questioning whether buying Lucent's fiber business would be a wise move for Alcatel or a positive one for its investors. That's in part because Alcatel's released a string of financial caveats between last night and this morning.

At first glance, these announcements seem confusing. As one analyst put it, "They're confusing because Alcatel's confused." Here are the highlights:

  • Second-quarter guidance reduction. Instead of guiding toward a 5 to 15 percent increase in revenues, Alcatel is now predicting a loss in the second quarter of 3 billion euro, roughly US$2.57 billion. The company cites a range of causes for the projected loss, including ongoing restructuring charges related to realigning its business, as well as writedowns in inventory and convertible bonds related to the submarine cable projects of 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO), in which Alcatel's invested.

  • Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) lowers guidance. Alcatel's optical components business has halved its revenue forecast for the second quarter. Now, instead of 50 percent growth, investors can expect to see 20 to 25 percent, thanks largely to a delay on submarine projects that require Optronics parts.

  • Ongoing restructuring. In an effort to weather the present financial storms, Alcatel's taking steps to focus its business strictly on service providers via its carrier networking and optics businesses and to sell its other businesses or phase them out. In this vein, it plans to spin off its Nexans wiring and cable business in an IPO during the second fiscal quarter. Alcatel also will begin to phase out or sell its cellular handset business and its enterprise equipment distribution business.

    Alcatel will also look to weed out the nonstrategic elements of its optical components and space business, which remain key to its future growth. Products such as microelectronics, batteries, and antennas that are profitable but not considered part of the core business will be sold.

  • More layoffs and plant closings. In several awkwardly worded statements in public and on paper, Alcatel's made it clear that it's not done cutting its costs worldwide. That includes reducing staff in the U.S. and in Europe, although Alcatel is considerably more constrained from acknowledging this in Europe, where laws require the firm to clear employment arrangements with different bodies, including trade unions, ahead of announcing them. In today's conference call, Serge Tchuruk said an announcement about European cost cuts would be made "soon."

    One area where Alcatel won't cut jobs or plants is in the Asia Pacific region. Tchuruk said in this morning's call that there was "no point cutting there" because nothing would be gained by reducing the firm's Asian presence.

  • Capital gains maintained. Despite its projected losses, Alcatel is confident of realizing 2 billion euro (about US$1.7 billion) in capital gains for the second half of 2001. That income is coming from the sale of assets that Alcatel's already negotiated, Tchuruk says.

Analysts are not surprised by all this but they're treading cautiously. "Overall, management did not highlight any new risks that are not already well known to investors," wrote Tim Anderson, VP at Salomon Smith Barney in a research note today. "We recognize the news from Alcatel is not positive and it is likely to weigh on the shares over the next several days."

Going forward, Alcatel says it's buttressing its latest actions with an openness to future consolidation moves, but that it isn't hunting them down. The company also hopes to continue to build up its U.S. presence by selling carriers a range of core networking gear, including DWDM, ATM, and softswitch products.

Would buying Lucent's fiber business help the U.S. push? Not likely, some analysts say. "I think the market reaction would be negative," said one European analyst. "The fiber business is in a downturn. And Alcatel hasn't proven itself to have a good acquisition strategy. The latest merger talks with Lucent bear this out. And with these announcements they've written down the value of previous acquisitions, such as Xylan and Internet Devices."

At press time, Alcatel shares were trading at 25.18, down 2.23 (8.14%).

- Mary Jander, Senior Editor, Light Reading

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