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Optical/IP

Lucent Breaks Through on Covenants

Lucent Technologies Inc. (NYSE: LU) turned a corner late yesterday, with news that it's successfully gotten its bankers, led by J.P. Morgan & Co. and Salomon Smith Barney, to revise the terms of the company's credit facilities (see Lucent Saves Its Credit).

Lucent now has the ability to take a $7 billion to $9 billion restructuring charge for the fourth quarter, which ends September 30. The creditors also have increased the requirements Lucent must meet in order to spin off its 58 percent stake in Agere Systems (NYSE: AGR).

Specifically, Lucent must now have $5 billion instead of $2.5 billion in cash to complete the spinoff. Luckily for Lucent, the banks have agreed to broaden the definition of "cash," giving the company a bit more leeway.

Additionally, the company must show positive EBITDA for one quarter prior to the redistribution of the 945 million Class B shares of Agere now held by Lucent. EBITDA (earnings before interest, taxes, depreciation, and amortization) is a typical gauge of liquidity.

Lucent seems confident that the restructuring will return it to profitability and give it the means to meet the Agere requirements for a spinoff in about six months' time. That's in part because the revised terms give a green light for Lucent to proceed in laying off an additional 15,000 to 20,000 people. In its latest earnings report July 24, Lucent execs said the additional restructuring, dubbed "Phase II," is required to bring the company back to profitability (see Lucent's Hopes Dimming).

"Our Phase II business restructuring program will enable us to create a sharper, leaner Lucent, and will enable us to return to profitability and positive cash flow during fiscal year 2002," said CFO Frank D'Amelio in a statement.

Indeed, analysts say this is bad news in only one respect. "This is bad news for people who acquired LU stock so they could get Agere stock when it was spun out," says David Jackson, optical networking analyst at Morgan Stanley Dean Witter & Co.

He says the news won't have much impact on Agere, which has been suffering its own round of layoffs and losses (see Agere Posts Q3 Earnings).

Wall Street issued a tiny round of applause for the move. By early afternoon today, Lucent shares were trading at $6.34, up 0.02 (0.32%).

Lucent investors had been sweating out the details of the company's credit covenants for a couple of months (see Lucent's Hopes Dimming). Without the revisions, Lucent may have faced a liquidity crisis. At least one Wall Street analyst, Steve Levy, has started to look more positively at Lucent (see Levy's Lucent Call Boosts Stock).

Yesterday's good news is bolstered by the company's recent successful bond offering, which raised $1.75 billion (see Lucent Boosted by Bond Offering).

But much remains to be done. The proposed layoffs, when complete, will make Lucent a much smaller company that it is now. Indeed, if the cuts come to 20,000, Lucent will have suffered the single biggest staff reduction among companies in this market since the slowdown began in January 2001 -- 30,500 employees, roughly 27 percent of Lucent's worldwide workforce.

Lucent isn't giving a specific timeframe for the layoffs. Some of the cuts will take place during the present quarter, which ends September 30. Many employees will simply receive notification without being let go until after the quarter ends. And in areas outside North America, where laws require layoffs to be negotiated with workers ahead of time, the timeframe is open.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
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