Alcatel Optronics Unit Worth as Much as $15 Bln, Analysts
Say
By Cecile Daurat
Paris, Sept. 19 (Bloomberg) -- Alcatel SA will value its fiber-optic parts unit at as much as $15
billion when it becomes the first European company to sell tracking shares, following U.S.
companies such as AT&T Corp. and Sprint Corp., analysts said.
Europe's second-biggest phone-equipment maker has said it will sell shares representing a
fifth of the division before the end of the year. Shareholders will vote on the plan tomorrow.
In step with Lucent Technologies Inc. and Nortel Networks Corp., Alcatel wants to highlight the
value of its Optronics unit as demand for parts that boost the traffic a phone network can carry
soars. That's driven up shares of rivals, such as JDS Uniphase Corp. of the U.S., making
investors hungry for more.
``This is one of the hottest markets today and Alcatel knows it,'' said Ben Hauzenberger, who
manages about $580 million in European technology stocks, including Alcatel, for Winterthur
Credit Suisse Group in Zurich. ``It's an area whose potential we're only beginning to see.''
While sales at Optronics, which makes lasers, filters and other parts, accounted for less than
one percent of Alcatel's 23 billion euros ($19.6 billion) of sales in 1999, it's growing more than
three times faster than the company as a whole.
The division uses a technology called dense wave division multiplexing, or DWDM, which
expands a network's capacity by letting it transmit multiple light signals at different
wavelengths over one fiber.
A European Trend?
By choosing to sell tracking stock, Alcatel can sell shares, raise money and give Optronics a
currency with which it can make acquisitions -- without giving up ownership of the unit.
It may also start a trend in Europe, analysts said.
``It will be a blueprint,'' said Barbara Byrne, a managing director at Lehman Brothers Holdings
Inc. ``European companies are well suited for tracking stocks. They can take advantage of the
scale of a large brand and create a separate currency to capture a better valuation for a unit.''
Tracking stocks have gained in popularity as a way to let fast-growing divisions trade
separately, because companies can use the shares to help pay employees as well as
finance acquisitions without depressing earnings by using cash or debt. Byrne, who helped
create the first tracking stock in 1984 when General Motors Corp. bought Electronic Data
Systems Corp., said there are about 40 tracking stocks in the U.S.
Valuation
Holders of this class of Alcatel shares will be entitled to voting rights in the mother company
but the dividends they receive will be related to the performance of Optronics, Alcatel said.
Because Optronics will be a tracking stock and part of a big company -- sheltering it from
takeover speculation -- analysts said Alcatel would have to price the stock below recent
acquisitions in the industry and publicly traded rivals.
Based on the unit's estimated 2001 sales of 650 million euros and multiples of between 20 and
30, Optronics would be valued at about 15 billion euros, according to a July 28 report by
Merrill Lynch analysts Adnaan Ahmad, Anita Farrell, Alec Shutze and Sherief Bakr.
That compares with the multiple of 80 times sales that San Jose, California-based JDS
agreed to pay for SDL Inc. in July. JDS shares have more than tripled in the past twelve
months, though they have lost a third of their value since a March 6 high.
Emmanuel Bousquet, an analyst at Credit Lyonnais Securities, said Optronics could fetch 16
to 18 billion euros ($13.6 billion to $15.3 billion), based on Optronics' estimated 2001 sales of
680 million euros and using a multiple based of comparable stocks, including JDS.
Scarce Opportunities
Taking a more cautious view on the value of tracking stocks, William Choi, a PaineWebber
analyst, said in an interview last month that Optronics should be worth about half of JDS's
valuation of 48 times sales, or about $8 billion or $9 billion. Analysts expect Optronics sales
will reach $400 million in 2000.
``There's scarcity of pure companies in the optical components area -- but scarcity has its
limits,'' said Choi. ``If you buy a tracking stock, what do you get? You own piece of paper
that's tracking assets of a unit of Alcatel.''
Alcatel declined to comment on valuations for the unit.
The world's top telecommunications equipment makers are all hoping to benefit from soaring
demand for fiber-optic parts.
Lucent, the No. 1 phone-equipment maker, plans to sell about a fifth of its semiconductor and
components business in an IPO in the first quarter next year. Analysts have said it could raise
as much as $15 billion. Lucent is No. 2 in both components and glass used in fiber-optics
networks behind JDS.
Rival Nortel Networks Corp. also expects to sell shares in its fiber-optic components unit by
next year, Chief Executive John Roth told Bloomberg in an interview last week. The IPO
could come before the end of next summer, Roth said.
Soaring Demand
The worldwide market for the optical components used in long- distance telecommunications
networks is expected to more than triple to $23 billion by 2003 from $6.6 billion in 1999,
according to RHK Inc., a market researcher.
``There's a 26-week to a year backlog on certain types of optical components,'' said Jay
Liebowitz, director of RHK's optical components service. ``Some companies are increasing
capacities five times in a year and that's not enough. We see the demand continuing to grow
at that pace.''
Alcatel, which two years ago was loosing market share to North American rivals in its home
European market, has struck back with a string of acquisitions in equipment that allows for
faster- Internet access and data transmission. In May, it bought Newbridge Networks Corp.,
Canada's No. 2 maker of phone equipment, to gain a bigger foothold in North America.
The sharper focus and return to growth has driven a doubling Alcatel's stock this year, making
it the second-best performer on France's benchmark CAC 40 Index after Thomson Multimedia
SA, the world's fourth-biggest maker of consumer electronics.
Alcatel's stock has risen 91 percent, compared with a 24.9 percent gain in Bloomberg's
five-member European telecommunications equipment index.
Selling shares in Optronics may push Alcatel higher, analysts said.
Shares of smaller European fiber-optic companies have soared this year. HighWave Optical
Technologies SA of France has more than doubled in value since it raised 74.9 million euros in
a June IPO on France's Nouveau Marche. Pandatel AG, based in Hamburg, has more than
quadrupled in value since its November IPO on Germany's Neuer Markt index. And ADVA AG
Optical Networking, based near Munich, has seen its stock multiplied by ten in the past year.
``Alcatel is a giant in the sector, so it should be a core holding if you want to invest in fiber
optics,'' said Boris Boehm, who helps manage 9 billion euros of equities including Alcatel at
Nordinvest in Hamburg. |
