Can A $2.1 Billion Lifeline Turn This Laggard Around?

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Goldman and Credit Suisse recently agreed to throw Alcatel-Lucent (NYSE: ALU) a $2.1 billion lifeline. The cash infusion comes in the form of secured credit papers. The loans mature between three and six years from now and are secured by Alcatel-Lucent’s intellectual property assets. Unfortunately, Alcatel is trading at price multiples that are too low for long-term investing. In this article, I will explain why the Goldman and Credit Suisse loan will not lead to price multiples that are reasonable for investors looking to buy Alcatel-Lucent stock.


Alcatel-Lucent posted revenues of $13.6 billion in the nine months ended September 30, compared to $14.6 billion in the nine months ended September 30, 2011. Gross profit for the nine months ended September 30, was $4.1 billion compared to $5.1 billion for the nine months ended September 30, 2011. Cash and cash equivalents was $737 million compared to $3.9 billion for the same period last year.

Second quarter revenue increased 10.6% sequentially and decreased 7.1% year-over-year to $4.68 billion. At constant currency exchange rates and perimeter, revenue increased 9.5% sequentially and decreased 13.2% year-over-year. Networks witnessed a double-digit decline this quarter compared to the year ago period. Gross margin came in at 31.7% of revenue for the quarter, compared to 34.9% in the year ago quarter and 30.3% in the first quarter 2012. The year-over-year decline in gross margin results from overall lower volumes and an unfavorable geographical and product mix.

In its third quarter financial statement, Alcatel-Lucent’s gross margin came in at 29% of revenues for the quarter, compared to 35.3% in the year ago quarter and 31.7% in the second quarter 2012. The company reported a net loss of $193.0 million or $0.08 per share. Revenue increased 1.5% sequentially but decreased -2.8% year-over-year to $4.76 billion. At constant currency exchange rate and perimeter, revenues were flat sequentially and decreased -9.7% year-over-year.

“Our third quarter results are reflective of the significant transformation we are undertaking both in terms of scope and times,” said Verwaayen, the company’s CEO. “In addition, our revenue growth and gross margin were impacted by overall spending dynamics and product mix, especially in the wireless.”

Why The Loan Won't Boost Price Multiples

Alcatel-Lucent's problems can be blamed on the weak macroeconomic environment in its home market of Europe. They can also be blamed on its sluggishness in adopting cloud technologies, the company has lost significant market share to leading blue-chips like AT&T (NYSE: T) and Verizon (NYSE: VZ).

In October, AT&T teamed up with IBM (IBM) in a combined effort to capture a bigger piece of the $14 billion market for cloud services. IBM agreed to provide the data-storage facilities and services, while AT&T offered the global network that clients use to retrieve the data. The dynamic duo will split the revenue from the deal. 

In November, Verizon re-positioned itself as one of only a few global players that will survive in the enterprise sector by focusing on leveraging its new capabilities in the cloud and mobility space. The $612 million acquisition of Hughes Telematics, and the $1.4 billion purchase of cloud-computing giant Terremark Worldwide are evidence of this new focus. 

Experts also say Alcatel-Lucent has been bleeding cash since its 2006 merger combining Alcatel and Lucent. Still, others put the blame on the failure of Alcatel-Lucent to deal with its short and long-term debts.

“However, despite having demonstrated our ability to deliver operational profitability, it is clear from the deteriorating macro environment and the competitive pricing environment in certain regions challenging profitability that we must embark on a more aggressive transformation,” said Ben Verwaayen, the company’s CEO.

In early December, Alcatel-Lucent signed a mega deal to provide its core router to Telefonica (TEF), one of the world’s largest communication service providers. It announced that its cloud management solution now supports an expanding array of popular open source cloud computing software. It also won a major deal with Sprint (NYSE: S), which is in the midst of an estimated $4 billion multi-year 3G and 4G LTE network initiative. Sprint laid off 5,000 workers. Yet, it still posted unimpressive third quarter results.

The $2.1 billion lifeline may be used for day-to-day operations. Goldman and Credit Suisse want Alcatel-Lucent to survive and pay the debts back. However, if we compare Alcatel-Lucent’s initiatives this year to its financial statements, it is clear that Alcatel-Lucent has not improved its position in comparison to the previous year. In addition, net losses have been increasing. Alcatel-Lucent is not operating at an optimum efficiency level.


Alcatel-Lucent has not been able to increase its market share in the wireless market. Looking at the successive initiatives and worsening margins, I can safely say that Alcatel-Lucent is not a good buy at the moment.

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