Jonathan Stempel and Dominique Vidalon from France
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.
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.
"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.
"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.
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.