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Follow UsWilliam Emmanuel and Lucas van Grinsven
PARIS/AMSTERDAM: France's Alcatel is in talks to buy smaller U.S. rival Lucent and create the world's biggest network equipment maker, the latest in a wave of consolidation in the telecoms industry.
The new group would be incorporated and headquartered in France, two sources close to the matter said on Friday, adding that an agreement could be announced as soon as next week.
A merged company would have combined sales of more than $25 billion, and be better equipped to negotiate prices with its telephone company customers, which have led the industry's consolidation trend, analysts said.
It would allow Alcatel to expand its reach into the United States, where it could capitalize on Lucent's contracts in wireless networks with companies such as Verizon Communications.
For Lucent, a merger could breathe new life into a company that has struggled to keep its footing after a rapid downturn in spending on its older products as communications companies upgrade networks to Internet-based technology, analysts said.
In terms of geography, product lines and services the two companies match up "incredibly well," said Tony DeSpirito, a portfolio manager at Pzena Investment Management LLC, one of the biggest holders of Lucent shares as of Dec. 31.
"It's a nice coming together," he said.
Lucent Technologies Chief Executive Patricia Russo would serve as chief executive of the new company, and both companies would get equal board representation, another source said.
Alcatel and Lucent officials declined to comment.
The companies earlier on Friday said they were discussing a "merger of equals" that they intended to price at market, meaning shareholders would not receive a premium for their stock.
Alcatel shares rose to their highest level in two years on the news, while Lucent shares closed up more than 8 percent.
SECOND ROUND
This is the companies' second time around at the bargaining table. They first discussed a merger in 2001, but Lucent executives balked at the idea of Alcatel domination. Lucent's market capitalization is about $12.6 billion, compared to Alcatel's value of about $22 billion.
The Lucent management that broke off the talks five years ago has since been replaced, but some analysts believe this issue could prove problematic again.
The political environment in the United States and France could also present problems for a trans-Atlantic entity, analysts said, as New Jersey-based Lucent has defense contracts with the U.S. government.
Shareholders might not be happy about the proposed price, said Pranav Rawal, an equity analyst at Metropolitan West Capital Management LLC, a large Lucent shareholder.
"We're not happy that it's market price," he said.
Any deal, which would create a company with larger sales than market leader Cisco Systems, would probably involve Alcatel making a share offer for every Lucent share, investors and advisers said.
Alcatel shares trade at 19 times estimated 2006 earnings, while Lucent's trade at a little over 14 times. The average for the sector is 17 to 18.
DO AS CUSTOMERS DO
The rapid conversion of technologies and the growth of television, high-speed Internet and voice services over phone lines is prompting consolidation in the telecoms and media sectors.
Major customers such as AT&T have led the way in consolidation. SBC Communications bought the old AT&T Corp., renaming it AT&T Inc. It also has put in a $64.5 billion bid for BellSouth.
That consolidation, along with what some analysts say is a surplus of equipment providers and a reliance on declining wireline product sales, has led to tough times for Lucent.
Cost savings in R&D spending could be $1 billion to $1.5 billion, or about 5 percent to 6 percent of the merged company's revenue, Pzena Investments' DeSpirito said.
"Potentially, I don't see a reason you can't cut your R&D budget almost in half," he said.
As of Dec. 31, Pzena was Lucent's fifth-largest shareholder, with 106.5 million shares, or about a 2.4 percent stake, according to FactSet Research Systems Inc.
A LEGACY DEAL FOR ALCATEL'S CEO
A merger would help 68-year-old Alcatel Chief Executive Serge Tchuruk leave a bigger and more secure company when he retires in three months.
"This is a major event for his legacy," said one French buy-side analyst.
Alcatel intends to keep its stake of almost 10 percent in European defence electronics group Thales, amid market speculation it could sell the stake to defence and aerospace group EADS to facilitate the planned merger.
French financial advisers believe Tchuruk has also looked at media technology company Thomson for a takeover similar to the buy of set-top-box maker Scientific-Atlanta by Cisco.
(Reporting by Astrid Wendlandt in Paris, Ransdell Pierson, Herb Lash and Robert MacMillan in New York, Jessica Hall in Philadelphia and Rex Merrifield in Helsinki)