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Technology Stocks : Alcatel (ALA) and France
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To: Steve Fancy who wrote (2522)10/5/2000 5:15:46 AM
From: elmatador  Read Replies (1) of 3891
 
FT: "...Alcatel will have to pay rich premia. It risks creating an undervalued acquisition currency that may not be a match for real equity..."


Lex: Alcatel
Published: October 4 2000 20:22GMT | Last Updated: October 4 2000 20:29GMT



The crossing of the Atlantic by the tracking stock phenomenon is not a cause for rejoicing. Alcatel is creating the first European tracker for its high-growth optical components division, to create a acquisition currency. Investors might have preferred an equity spin-off.

True, Alcatel has a stronger case than most for choosing this route. Alcatel Optronics needs to play a more aggressive role in the consolidation of an industry whose annual sales are forecast to quadruple to $23bn between 1999 and 2003. But components supply for optical communications systems, where Alcatel is a world leader, is so constrained that owning a supplier is itself a competitive advantage. Components are also the source of much innovation in optical systems. So Alcatel needs to keep control - and a partial equity spin-off followed by acquisitions could have diluted its stake below 50 per cent. A tracking stock is an attempt to square the circle.

But the problem with tracking stocks - which confer ownership of cash flows but not underlying assets - is that they typically trade at a discount. Wednesday's E8.1bn-E9.5bn (£4.9bn-£5.70bn) valuation represents just 12-14 times forward revenues, half the multiple enjoyed by JDS Uniphase, the biggest standalone optical components maker, and a fraction of some counterparts' 50-60 times multiples. This is deliberately conservative, and investors may seize the chance to hold scarce optical paper. But to buy other components groups, Alcatel will have to pay rich premia. It risks creating an undervalued acquisition currency that may not be a match for real equity.
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