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Planting for the Future

Alcatel and Lucent are in various stages of selling several manufacturing plants. Will it help?

June 25, 2001

4 Min Read
Planting for the Future

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) are in various stages of shedding some manufacturing plants worldwide -- to the greater glory of their balance sheets, they hope, if not their labor relations.

Alcatel this morning announced an intent to sell its 320,000-square-foot, 450-employee manufacturing facilities in Richardson, Texas, to Sanmina Corp. (Nasdaq: SANM), a contract manufacturer based in San Jose, Calif. The companies hope to close the deal (terms undisclosed) by September 2001 (see Alcatel Selling Texas Plants).

For its part, Lucent is reportedly in talks to sell or lease two plants, including a 5,300-employee, 2-million-square-foot facility in Columbus, Ohio, which makes wireless gear; and a 3,700-employee, 1.8-million-square-foot plant in Oklahoma City that makes Lucent's 5ESS and AnyMedia Access System.

Today's Wall Street Journal reports that contract manufacturer Celestica (NYSE, Toronto: CLS) has bid between $600 million and $900 million for the plants, after Lucent turned down a deal with Flextronics International (Nasdaq: FLEX).

Lucent, Celestica, and Flextronics declined to comment on the story or the rumors.

Both Alcatel and Lucent's deals point to a trend in the telecom market to outsource manufacturing to third parties.

"A major driver [for the contract manufacturing business] is divestiture opportunities that exist with major OEMs -- the Nortels, the Lucents, the Alcatels," says David Parrish of RBC Dominion Securities/Dain Rauscher Wessels. The telecom slowdown hasn't had a marked effect on this trend, he says, which has proven strong for a couple of years and will probably continue for the next several years.

Both Alcatel and Lucent have been talking for months about outsourcing various manufacturing efforts in order to raise money and save ongoing expenses. Now, though, it looks as if the plans have become more urgent.

Lucent is under enormous pressure to restructure itself and to raise money by September in order to complete its spinoff of Agere Systems (NYSE: AGR). And Alcatel's CEO Serge Tchuruk recently stressed plant divestitures as part of Alcatel's ongoing restructuring plans to meet the challenge of the recent telecom slowdown (see Alcatel: What's Next?).

As part of its plan, Alcatel already has sold an 800-employee mobile handset manufacturing facility in Laval, in western France, to Flextronics. Alcatel says it is now converting a second mobile handset plant in Illkirch, in eastern France, into a facility for manufacturing Alcatel's optical components.

Analysts think the plant sales will work for both Alcatel and Lucent. "These companies are dying to have someone take these plants off their hands," said one Wall Street analyst, who asked for anonymity.

"It's a great idea -- sell the factories and lease back what they need," says Fredric Russell, principal of Fredric E. Russell Investment Management Co., a $50 million fund headquartered in Tulsa, Okla.

But one glitch has surfaced. Both Alcatel and Lucent have contracted unions at the plants in question, and analysts say that could affect the deals. "Having labor contracts implies that management may not have as free a hand in firing people and slashing wages," the unnamed analyst says. "And face it, that's what Wall Street likes to see."

Alcatel says its plans are to include all employees as part of the package sold to Sanmina. But employees in the union with which Alcatel has its Richardson plant contract -- the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers, AFL-CIO, Local 787 -- say they haven't been contacted by either company to discuss the sale. About 370 of the 450 workers in Alcatel's Richardson plant are IEU members.

"We have two years left on the Alcatel contract, but that's no guarantee. Frankly, it's hard to tell what's going to happen. We hear that Sanmina doesn't have collective bargaining agreements in the U.S. But we're here to talk to them if they want to talk to us," says a union spokesperson.

Sanmina did not respond to calls at press time.

Lucent also has agreements in place with unions in Oklahoma and Ohio, which did not return calls at press time.

Parrish of RBC says the union contracts are a factor to be considered. "It's a challenge... The price of a plant has to reflect that."

- Mary Jander, Senior Editor, Light Reading

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