Lucent Boosted by Bond Offering

Lucent Technologies Inc. (NYSE: LU) has finally gotten some good news. The company’s stock was up 0.26 (4.24%) to 6.29 in early trading Thursday on the announcement late yesterday that it had successfully raised $1.75 billion through an offering of redeemable convertible preferred stock, a form of hybrid bond/stock financing.

The successful bond offering is notable on a couple counts: It shows that investment firms are willing to step up and offer Lucent more financial support. Also, the strong demand for the offering sends the signal that Wall Street firms are still willing to finance telecom equipment companies even during these gloomy times -- if the terms are right.

On Tuesday, Lucent announced plans to raise $1 billion through a convertible stock offering (see Lucent Looks for More Cash). Demand was strong enough that the company was able to raise the total amount of the offering to $1.75 billion. This strong demand is a positive sign that investors are confident that Lucent will pull out of these troubled times, say industry watchers.

What’s more, investors exercised options to buy an additional $135 million in convertible stock, lifting the total raised to $1.89 billion, said company officials after the market opened Thursday morning.

Even though the company was downgraded by Standard & Poors on Tuesday and by Moody's Investors Service on Wednesday, institutional investors couldn’t seem to resist the favorable terms offered by Lucent. At $1,000 per share, the convertible preferred shares have an annual dividend rate of 8 percent and are convertible into Lucent common stock at a conversion premium of 22 percent over the closing stock price of $6.13 a share (convertible at a price of $7.48 per share).

Considering that some analysts -- like Steve Levy of Lehman Brothers -- are betting that Lucent's turnaround is on track, the deal has a strong potential upside for investors. But there is also some risk for those buying the bonds. While bondholders make money when the share price goes above $7.48, and they have the option of redeeming their investment, there is the potential risk that Lucent will go out of business and default on its debt.

“Most people believe that Lucent will hang in there,” says one bond dealer who didn’t want his name used. “But there’s a much greater chance now than a year ago that the company could just go out of business, so it’s not totally without risk.”

Another potential downside is that the convertible offering could dilute Lucent’s value; but Levy, who recently became one of Lucent's staunchest supporters (see Levy's Lucent Call Boosts Stock) says that it’s well worth it. In a note sent out to investors this morning, Levy says he doesn’t expect dilution in 2002, and expects dilution to Lucent’s earnings in 2003 to be only about $0.02 to $0.03 per share, or around 5 percent. But he says the potential dilution is outweighed by the additional $1.75 billion in cash Lucent gains immediately.

"This offering provides incremental financial stability at a time when the company is expected to take a $2 billion cash charge for Phase II restructuring if credit agreement covenants can be amended and given the other rigid debt covenants that Lucent is currently working its way through,” he writes in his note.

Meanwhile, Lucent is still trying to negotiate revised terms of an earlier $4 billion short-term loan agreement (see Lucent's Hopes Dimming). The extra cash should help the company nail down an agreement. Levy also believes that the offering could help facilitate or expedite the spinoff of Lucent's ownership of Agere Systems (NYSE: AGR) to Lucent shareholders.

“In summary,” writes Levy, “$2 billion of cash in Lucent's hand today is worth a lot more, in our view, than a small dilution to earnings two years from now.”

- Marguerite Reardon, Senior Editor, Light Reading

johnjohn 12/4/2012 | 8:00:13 PM
re: Lucent Boosted by Bond Offering So what is the motivation behind the institutional investors? How much $ will they make in the grand scheme of things? They've already lost billions in lost shareholder value!
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