Alcatel Widening Its Fiber Net
investors.com
"Known for undersea fiber optics, firm pursues land-based growth in U.S.
By Mike Angell
Investor's Business Daily
French firm Alcatel Alsthom SA’s optical networking business seems to be all wet. But Christian Reinaudo insists that’s not the
case.
Reinaudo, president of Alcatel’s optics group, was in Dallas this week to address investors. He told them the leading builder of
undersea optical networks continues to see strong growth in that market.
At the same time, it’s pushing to take a bigger share of the $20 billion land-based North American optical market from rivals
Lucent Technologies Inc. and Nortel Networks Corp.
"We didn’t perceive any kind of slowdown in growth in our optics business," Reinaudo said. "My main concern is to deliver
what I’ve promised."
Investors haven’t had much faith in Alcatel lately. After closing near 85 on Sept. 1, shares fell below 50 last week and are still
trading at about that level.
Some observers wonder if Alcatel can keep up its torrid pace. In the first nine months of 2000, Alcatel saw its optical business
grow 44% to $4.1 billion. For the entire year, analysts expect the company to sell nearly $6 billion in optical-networking
equipment, which uses lasers to send data in the form of light signals.
Alcatel’s undersea cable business has been one of its strongest performers. Undersea optical equipment sales are expected to
grow 45% to $10 billion this year. Industry analysts RHK Inc. estimate that such networks will account for about $4 billion of
Alcatel’s sales this year, and will be its top growth segment.
Trans-Atlantic Slowing
Alcatel has about 40% of this market, followed by Tyco International Ltd.
Image: Out To Sea
Most analysts expect the undersea cable market to grow 25%-35% next year. Many trans-Atlantic networks have been built
out. Reinaudo admits growth "will probably slow down a bit, but it’s still growing."
The new source of growth will be trans-Pacific networks, as well as underseas networks linking China with India and other
Asian countries.
Reinaudo says his firm has taken a lead in this market. He cites the roughly $1.5 billion in deals with Singapore’s Singtel and
fiber-optic network builders Level 3 Communications Inc. and 360networks Inc.
"Of course, these contracts could be postponed or delayed because of market conditions," Reinaudo said. "But we anticipate
building other Asian networks, as well as one or two more trans-Pacific networks."
But Alcatel faces a new competitor in that field, Nortel Networks. Alcatel bought Nortel’s undersea cable business in 1994. In
return, Nortel promised not to compete in that market for five years.
Nortel has said it will begin building small networks crossing rivers and bays. Reinaudo believes the technological difficulties of
making equipment that sits on the bottom of oceans will keep Nortel out of this market for a while.
"The only thing I can say to Nortel is good luck," Reinaudo said.
Alcatel also is the global leader in the market for digital cross-connects, the links in optical networks. They take a laser light
from one optical cable and send it on its next path. In North America, Alcatel is the No. 2 supplier, behind Tellabs Inc.
But industry analysts RHK Inc. expect the market for these products to remain flat. Newer, faster devices called optical
switches are expected to begin replacing digital cross-connects in fiber-optic networks.
Most analysts believe digital cross-connects will be needed for some time. But Alcatel is preparing for newer optical switches
to replace digital cross-connects.
"An electrical device is limited in terms of capacity," Reinaudo said. "We will need to go to something more optical."
Overall, though, Alcatel doesn’t sell much optical gear in the U.S. It has about 9% of the U.S. optical equipment market,
according to RHK. That places it fourth, behind Japan’s Fujitsu Ltd. "Alcatel is a laggard in the U.S.," Dresdner Kleinwort
Benson analyst Per Lindberg said.
But it got a recent boost by being named a second supplier of optical equipment to Sprint Fon Group. It’s also trying to boost
its presence by a recent deal with 360networks, which is building both North American and undersea fiber networks.
Alcatel will build two undersea optical cable networks for 360networks for about $2 billion. Alcatel also will supply $100
million in land-based optical equipment.
Buying Businesses?
In return, Alcatel took a $1 billion stake in 360networks. It has stakes in other networks, but this is Alcatel’s largest such stake
yet in a customer.
It’s common for equipment makers to take stakes in networks, Lindberg notes. Nortel, Lucent and Cisco Systems Inc. all
have spurred growth with creative use of vendor financing, he says.
But such practices increasingly are under fire. The concern is whether Alcatel is, in effect, buying the business. And with the
stocks of most fiber-optic networks in the tank, it may not seem the best kind of investment to make.
Reinaudo says there is no change in Alcatel’s vendor financing strategy. "When we support these kinds of deals, we have some
kind of collateral," he said. "In this case, we have convertible bonds."
Most analysts agree that the deal will help Alcatel gain share in North America.
"The question is what price you pay for risk," said Ian Burgess, an analyst at Credit Suisse First Boston. "People would have
been happier to see lower vendor financing. But I can understand the reasoning."
Alcatel’s technology may be a stumbling block as it enters the U.S. market. Alcatel is strong in SDH, a European standard for
sending data over optical networks. But the U.S. uses a standard called Sonet.
Analyst Thompson estimates that 5% of Alcatel’s optics business comes from Sonet products and 15% comes from SDH.
Reinaudo admits that Alcatel is "stronger in SDH than in Sonet, but we have significant product offerings in both categories."
And Alcatel’s proved it can adjust to change, analysts say. Alcatel turned itself around after missing numbers in 1998. It shed
older, slower growth businesses such as power cabling in favor of telecommunications equipment.
"1999 has been a turnaround year. 2000 has been a recovery year," J.P. Morgan’s Thompson said. "Alcatel looks more like a
Nortel or a Lucent, rather than the conglomerate it was." |
