Alcatel-Lucent strives for better targets after $2.1 billion bank loan

Alcatel-Lucent’s $2.1 billion credit facility from Goldman Sachs and Credit Suisse provides the company with a degree of financial security it was lacking after burning through cash since the merger of Alcatel and Lucent. To secure the loan, Alcatel-Lucent put up its patent portfolio as collateral, which it has long viewed as one of the company’s crown jewels. Alcatel-Lucent will use the funds to help finance its restructuring program, including its exit from some unprofitable managed services contracts.

As part of the loan agreement, Alcatel-Lucent set forth ambitious goals for 2015, when it expects to achieve gross margins of between 35 percent and 37 percent and an adjusted operating margin between 6 percent and 9 percent. To reach these goals, the company will significantly decrease SG&A expense and boost sales of IP and Network Applications, which contribute gross margins above its corporate average. To this point, Alcatel-Lucent remains wary of cutting its R&D budget due to the need to continue developing technology that could lead to a breakthrough in the marketplace.

Alcatel-Lucent’s ability to achieve its targets is suspect given the company’s history of being unable to turn itself around. Just this year it forecast operating income above 2011 levels, but lost €490 million (or $636 million) in 2012 compared to €250 million (or $324 million) in operating profit in 2011. Alcatel-Lucent will likely need to eliminate at least 10,000 more positions – through layoffs, business unit divestments and contract exits – after the initial 5,500 announced as part of the Performance Program to attain its margin targets.

Despite the loan agreement, Alcatel-Lucent needs to divest non-core businesses to reduce headcount and stockpile cash

Alcatel-Lucent’s Enterprise business will likely be divested before the end of 2014 as the company does not want to commit to a fire sale of its assets and would rather set a tentative deadline of 18 to 24 months. In light of its recent credit facility agreements, Alcatel-Lucent has a somewhat less immediate need to sell assets to raise cash, but it is still a bloated company with too many redundancies and Enterprise is a distraction from the core telecom equipment business. Enterprise is currently under the stewardship of CFO Paul Tufano, along with the Strategic Industries and Submarine businesses, which are also candidates for divestiture.

Competition in the enterprise networking space is heating up as Huawei and ZTE upgrade their technologies and capabilities and look to topple incumbents in developed markets, including the United States and Europe, where Alcatel-Lucent’s Enterprise unit is focused. Huawei and ZTE will undercut pricing of incumbents, much like they did in the telecom equipment market.

Huawei also operates a subsea cable business, called Huawei Marine, which Alcatel-Lucent also competes with. Alcatel-Lucent has received interest from private equity, France Telecom Orange, and the French Sovereign Fund for its Submarine unit. Both the Submarine and Enterprise businesses could fetch hundreds of millions of dollars.

Michael Soper, Research Analyst – Networking & Mobility Practice at Technology Business Research
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