Lucent investors worried about bankruptcy

By Ben Klayman

CHICAGO: Lucent Technologies Inc.'s repeated job cuts and financial warnings have left investors wary about whether the telecommunications equipment maker can avoid bankruptcy and straighten itself out.

"People had taken it for granted that Lucent had enough cash to stumble through the next year or so," said Shawn Campbell, analyst with Northern Trust Corp.'s asset management arm, one of Lucent's largest shareholders at the end of June with about 13.6 million shares. "If things do not improve in the end market, then these guys could potentially go bankrupt. There's not much room for error."

Lucent, based in Murray Hill, New Jersey, has been the poster child for an industry hit hard the last two years by repeated telephone company customer spending cuts, which have forced suppliers to slash jobs, sell units and post losses. Company executives dismiss bankruptcy fears, however.

"We do not see (bankruptcy) as a possibility," Lucent Chief Executive Patricia Russo said in a recent interview. "We have more than enough cash to fund the needs of this business." Lucent warned last week that it would report a wider-than-expected fiscal fourth-quarter loss, its second warning of the quarter, and said it would cut more jobs as it tries to match costs with shrinking sales.

Lucent also said it canceled its undrawn $1.5 billion bank credit facility. It is negotiating for a new facility analysts expect to be up to $750 million. Some analysts worry that Lucent will exhaust most of its cash over the next year. It burned through $1 billion in cash in its latest quarter and said it will hit next September with more than $2 billion in cash on hand, compared with $4.4 billion at the end of last month.

That has not eased fears among some investors, debt holders and industry observers, who worry about their investments becoming worthless if Lucent seeks bankruptcy protection. "We've heard too many companies say that they won't go bankrupt and they did -- very quickly after they said they wouldn't," said Ronald Redfield, portfolio manager at Redfield, Blonsky & Co., a New Jersey-based investment management firm that owns Lucent stock.

It also said it would cut 10,000 more jobs to bring its employment down to 35,000 by year end. Since launching its restructuring in January 2001, it has moved to reduce its work force by two thirds through four rounds of job cuts, the sale of its fiber cable unit and other plants, an early retirement buyout offer, outsourcing and attrition.

Some analysts worry the company is cutting workers it may need later when business begins to improve. Lucent is scheduled to report results on Oct. 23, and has promised more details on its cash position.

"It's not a clear-cut case. Some people say (bankruptcy) will not be an issue. Given the way the stock is trading, I would argue that that's not as air-tight as some expect," said Alex Vallecillo, senior portfolio manager with Armada Funds.

"Stocks don't trade at 65 cents for no reason at all. This is a company that's fighting for its life," said Vallecillo, who does not own Lucent stock but follows it closely. Lucent's stock was up 3 cents, or 4.4 percent, at 72 cents a share in trading on the New York Stock Exchange on Tuesday.

The shares have fallen more than 95 percent since Lucent launched its restructuring last year, compared with an 89 percent decline by the American Stock Exchange Network Index, which is made up of industry competitors. Others said bankruptcy is not the issue for Lucent, getting back to profits is -- a target the company wants to achieve by the end of fiscal 2003.

"I don't see a rationale for bankruptcy. That has to do with restructuring of debt and they've already done that," said Frank Dzubeck, a strategy consultant and president of Washington-based Communications Networks Architects. He pointed out that Lucent's next big debt crunch does not occur until 2006. It has about $7 billion in total debt.

Bruce Hyman, credit analyst with Standard & Poor's, which last week downgraded Lucent's credit rating deeper into "junk" status, said he is not concerned about the company filing for bankruptcy. Several analysts have expressed more concern about Lucent rival Nortel Networks Corp.

In the end, the sector needs fewer players, Hyman said. "The industry is oversupplied. Who flinches first is maybe really the way you want to look at this," he said.

Another factor is Lucent's customers, many of whom have large amounts of Lucent gear in their networks, analysts said. "The customers these guys have wouldn't allow (bankruptcy)," Dzubeck said. "They'd force a merger before that."

© Reuters