Alcatel May Buy Lucent for at Least $12.6 Billion (Update6)
March 24 (Bloomberg) -- Alcatel SA, the world's biggest maker of broadband Internet gear, may buy Lucent Technologies Inc. for at least $12.6 billion to triple sales in the U.S.
Lucent and Alcatel are in talks about a combination that would be ``priced at market,'' the two companies said in a joint statement. Merger talks between Paris-based Alcatel and Murray Hill, New Jersey-based Lucent failed five years ago.
A union would create a company with more than $25 billion in sales, distancing Ericsson AB of Sweden and challenging San Jose, California-based Cisco Systems Inc. Shares of Alcatel, which lost money from 2001 to 2003, and Lucent, which racked up losses of $30 billion around the same period, are trading at less than they did a decade ago as they fell behind competitors.
The purchase ``would allow Alcatel to reach a critical size and diversify in mobile equipment,'' said Samir Essafri, a fund manager at Richelieu Finance in Paris, which oversees more than $3.5 billion. ``The industry has strong pressure on prices, it's an industry that's still recovering.''
Shares of Alcatel jumped as much as 4.8 percent to 13.47 euros, and traded at 13.29 euros at 10:52 a.m. in Paris. Before today, Alcatel was up 23 percent this year to the highest in almost two years. Lucent jumped 9.9 percent to $3.10 at 10:51 a.m. in Frankfurt, from the close of $2.82 yesterday in the U.S. Before today, they had risen 6 percent this year.
Shares of rivals gained as a deal might spark more takeovers. The Bloomberg Europe Telecommunication Equipment Index, which includes Alcatel, Ericsson, Nokia Oyj and GN Store Nord A/S, rose 1.3 percent. Ericsson stock rose 2 percent to a four-year high.
Alcatel Turnaround
Alcatel Chief Executive Officer Serge Tchuruk has spent a decade turning around the company and will be retiring from day- to-day management this year. The company is winning orders from companies including AT&T Inc. to build networks carrying Internet, phone calls and TV, and Lucent would complement its product line.
``With Alcatel having a stronger presence in Europe and Lucent in the U.S., the merger can help them expand their channels and increase efficiency,'' said Naoki Sato, an analyst at Morgan Stanley Japan Ltd. in Tokyo who covers Japanese equipment makers.
Alcatel has a market value of $21.9 billion, and Lucent, the largest U.S. maker of phone equipment, is valued at $12.6 billion.
Lucent trades at 17.2 times estimated earnings for the year through September, based on estimates compiled by Thomson Financial. The 12-member Bloomberg U.S. Telecommunications Equipment Index trades at an average of 25.3 times.
During the 2001talks, Alcatel balked at Lucent's insistence that the company be run as a merger of equals, a person with knowledge of the talks said at the time.
Industry Mergers
Suppliers are on the lookout for takeovers as acquisitions by phone companies reduces their client base. Ericsson, the world's largest supplier of mobile-phone networks, in January bought the telecommunications equipment business of Marconi Corp. for 1.2 billion pounds ($2.1 billion) to expand its fixed-line business.
Cisco, the world's largest maker of networking gear, Cisco agreed in November to buy Scientific-Atlanta Inc. for $6.9 billion to enter the growing market of Internet TV. Lucent this week won an auction to buy Riverstone Networks Inc., a bankrupt maker of network routers, for $207 million, outbidding Ericsson.
Among clients, Spain's Telefonica SA has bought U.K. mobile operator O2 Plc for 17.7 billion pounds, and Sonea SGPS SA in February offered 10.7 billion euros for Portugal Telecom SGPS SA.
In the U.S., SBC Communications Inc. bought AT&T Corp. for $16 billion last year and changed the name of the combined company. Earlier this month the new AT&T bought BellSouth Corp. for $67 billion cementing its leadership position in the U.S. and giving it full control of Cingular Wireless LLC.
Tchuruk's Final Deal
The talks come as Tchuruk prepares to retire in June because of an age limit within Alcatel's statutes. The 68-year old Frenchman has recommended to Alcatel's board of directors that Chief Operating Officer Mike Quigley replace him.
Lucent Chief Executive Officer Patricia Russo, 53, is counting on Chinese wireless companies such as China Unicom Ltd. to receive licenses to build and operate third-generation networks, which will use Lucent's equipment.
Cingular, the largest U.S. mobile-phone company, is among operators that plan to use Lucent to help offer combined voice, video, data and multimedia services.
``There can be no assurances that any agreement will be reached or that a transaction will be consummated,'' the companies said in the statement.
Alcatel and Lucent combined would challenge Cisco for the top spot. Cisco had sales in the last calendar year of $26.2 billion. It would top Stockholm-based Ericsson, the world's largest maker of wireless networks with 2005 sales of $19.4 billion.
`Driving Seat'
Based on Alcatel's market value of 18.78 billion euros and net cash position of 1.46 billion euros at the end of December, and Lucent's value of 12.6 billion and net debt of $1.04 billion, the French company would make up 68 percent of the enterprise value of the merged entity.
``Looking at the relative market capitalizations, Alcatel would most likely end up in the driving seat,'' said Richard Windsor, an analyst at Nomura, in a note to investors.
Alcatel has recovered after winning orders from companies such as SBC, now AT&T, and Telstra Corp. located in Australia.
In February Alcatel said fourth-quarter profit jumped to 344 million euros ($414 million) from 7 million euros a year earlier and announced its first dividend in four years.
The annual cost of insuring 10 million euros of Alcatel debt for five years rose as much as 50 basis points, or 50,000 euros, to 140 basis points after the companies said they were in talks, according to Deutsche Bank prices. The swaps were trading at 114 basis points at 9:30 a.m. in London today.
Biggest Acquisition
Should Alcatel buy Lucent, it would be the French company's biggest ever acquisition, topping a $6.9 billion purchase of Newbridge Networks Corp. in 2000.
After spinning off from AT&T in 1996, Lucent became among the highest flyers in the bull market. The shares soared more than sevenfold from the end of 1996 to a high of $63.22 in December 1999. They've since lost 95 percent of their value.
Lucent posted a first-quarter loss of $278 million in January as sales fell $21 million from a year earlier to $2.05 billion. Lucent, whose stock fell 29 percent last year, faces mounting concerns of losing out in the growing market for Web-based communications equipment. Sales unexpectedly fell last quarter, and in January Lucent said U.S. and Chinese demand is slumping.
Alcatel spokeswoman Regine Coqueran could not be reached on her office and mobile phones, and didn't immediately return a message left on her voice mail.
To contact the reporters on this story:
Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net;
Ari Levy in San Francisco at alevy5@bloomberg.net
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