DJ THE SKEPTIC: Alcatel Better Off Looking Beyond Lucent
18 May 11:18
By Robb M. Stewart
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--Is Alcatel (ALA) about to make a very costly mistake?
Even the suggestion Alcatel could go ahead with an offer for ailing Lucent
(LU) cost the French telecoms group a sharp drop in its share price.
And rightly so.
According to JCF Group figures, Lucent sits on a forward EV/EBITDA of 47.4,
compared with only 11.4 for Alcatel and 21.9 for Cisco Systems (CSCO). It's
EV/Sales ratio is 1.44 against Alcatel's 1.34.
So even with the almost 80% slump in Lucent's shares over the last year, it
still doesn't look cheap.
There's also the question of whether Alcatel shareholders will be willing to
fund the more than $40 billion acquisition, reported by the New York Times. A
bid, the NYT said, would be made mostly in stock and would represent a 20%
premium to Lucent's price Thursday.
The companies have declined to comment on the newspaper's report.
Investors, meanwhile, have a host of other concerns - product overlap,
regulatory reaction, differing management cultures - causing them to balk at
the notion of a bid.
There's also the U.S. reaction to consider. Lucent holders there might reject
or be forced to offload French paper, causing at least some flowback of shares.
That would weigh on Alcatel's price.
And the timing may not be right for Lucent, surely preferring a bigger
premium to a higher stock price once it follows through on plans to offload
businesses.
But don't throw the baby out with the bath water.
There are benefits in taking over a company such as Lucent, particularly the
attraction of the diving deeper into the U.S. market. The U.S. already accounts
for 22% of Alcatel's sales, and the company has said it wants that to grow.
There's also the promise of a much bigger R&D department; as often noted, the
shelf-life of "new technology" is limited. Plus, there's the likelihood of
economies of scale and a broader portfolio by adding Lucent's businesses.
Then there is timing. The fall in Lucent's shares might attract other
suitors, at least for its fiber optics unit, which many consider the business
Alcatel covets most. It's said as many as four suitors, including Alcatel, have
expressed interest in the unit already.
Alcatel currently sits in a stronger position than many of its rivals, with a
net debt-to-equity ration of below 30% and plans to sell some non-core assets,
though it hasn't escaped the downturn unscathed. Earlier this week, a $1.1
billion contract was suspended with 360 Networks (TSIX), in which Alcatel holds
$700 million worth of convertible bonds.
Since the companies won't comment, at this stage it all remains theoretical.
But considering the high risk, and the immediate pressure on Alcatel's
shares, it appears the downside outweighs the benefits. This could turn out to
be a far bigger buy than Alcatel can profitably digest.
Far better for it use its position of relative strength to seek out other
targets offering similar benefits as Lucent, but with less risk.
Given the state of valuations in today's market, these opportunities may just
surface.
-By Robb M. Stewart, Dow Jones Newswires; 44-20-7842-9294;
robb.stewart@dowjones.com
(END) DOW JONES NEWS 05-18-01
11:18 AM |
