Advertisment

‘Deprived’ Lucent calls off merger with Alcatel

author-image
CIOL Bureau
New Update

Jonathan Stempel and Dominique Vidalon from France

Advertisment

NEW YORK: Lucent, based in Murray Hill, New Jersey, and France's Alcatel,

broke off merger talks after it became clear that Alcatel viewed the merger as a

takeover of its money-losing US rival, rather than as a so-called "merger

of equals," sources said. Lucent and Alcatel announced the breakdown after

US stock markets closed.

Lucent Technologies Inc. will again have to focus on keeping its credit

ratings out of junk status, now that its merger talks with France's Alcatel SA

have been scrapped. Its cost-cutting plans and the sale of its fiber business

will again - from a credit perspective - take center stage, all three leading US

credit ratings agencies said on Tuesday.

"Clearly, a sale of the fiber business could provide the company with

near-term financial flexibility, which could help support their current

ratings," said Moody's Investors Service senior vice president Robert Ray.

"We'll also be looking for the impact of the cost reduction efforts to

begin to show material impact in its current quarter." In part to address

this, Lucent has been trying to cut costs, and last quarter took $2.7 billion in

restructuring and other one-time charges.

Advertisment

Michelle Davidson, a Lucent spokeswoman, said, "We continue to have

productive discussions with the rating agencies, and are keeping them informed

on progress on our business restructuring program." As of March 31, Lucent

had $ 2.3 billion of debt maturing within one year and $ 3.1 billion of

longer-term debt, according to a filing with the Securities and Exchange

Commission. Earlier this year it obtained $ 6.5 billion of bank credit lines.

Analysts have said Lucent's sale of its fiber-optic business could put $ 5

billion or more into its coffers. It will need this in particular, they said, if

it faces more problems in its vendor financing business, where last month it

took a more than $ 500 million write-down in connection with the bankruptcy

filing of Winstar Communications Inc.

A merger with Alcatel, which has higher credit ratings, could have alleviated

some credit concerns.

Advertisment

"We return to the business restructuring plan, where Lucent needs to

generate $2 billion of cost savings," said Bill Densmore, a Fitch analyst.

"We'll need to see the fruits of their labors by the third and fourth

quarters of this year."

Reuters also adds from France that

Alcatel's $23 billion merger with US rival Lucent Technologies collapsed and was

overshadowed on Wednesday by a shock of double profit-warning from the French

telecom’s equipment firm.

Soon after news that talks had failed filtered out late on Tuesday, Alcatel

said operating profit at its telecom business would slip this year and

restructuring charges and write downs would lead to a second-quarter net loss of

about three billion euros ($2.57 billion) at the division.

Advertisment

"The numbers are just scary. The size of the restructuring charges is

huge. I am clearly disappointed," said ETC analyst Manuel Lachaux, who cut

his rating on Alcatel to "reduce" from "hold" and Alcatel

Optronics to "reduce" from "buy".

Alcatel shares have fallen more than 14 per cent since merger talks to create

what would have been the world's top telecoms equipment group began almost two

weeks ago, as investors fretted over the longer-term risks of a deal with

debt-laden Lucent.

Industry sources say talks came to an abrupt halt after Lucent walked out

when it became clear Alcatel viewed the deal as a takeover of its US rival,

rather than "merger of equals", and because of disagreements over the

structure of the combined company's board and management control.

Advertisment

But the fact that Lucent's Chairman Henry Schacht had been prepared to talk

about a merger casts doubt on whether he has confidence in the loss-making

group's turnaround. Questions also surround Alcatel's strategy, which had been

hoping to boost exposure to the US, the world's biggest telecom market.

"We are seeing some short covering on Alcatel amid relief the merger

with Lucent did not go through. But we got two profit-warnings and these are not

minor warnings," said one trader. Alcatel said it was booking a

three-billion euro charge in the second quarter to cover restructuring and write

downs, notably of inventories and 360 networks convertible bonds it owns.

"The only two pieces of good news from Alcatel are the end of the talks

with Lucent and the refocusing on the networking, optics business," Lachaux

said. Alcatel said it planned to stop manufacturing mobile phone handsets and

would sell its enterprise business units to focus on its networking, optics and

space activities. It has already launched the sale of its Nexans cable unit.

(C) Reuters Limited 2001.

tech-news