Alcatel-Lucent to Cut 5,000 Jobs After Reporting Loss

Alcatel-Lucent SA (ALU) will cut 5,000 jobs after slumping to a loss, signaling Chief Executive Officer Ben Verwaayen’s effort to revive the company is losing steam and sending the stock to its lowest level since at least 1989.

France’s biggest phone-equipment supplier said today it will save an extra 750 million euros ($911 million) with the cuts, equal to about 6 percent of staff. The company, which in 2011 posted an annual profit for the first time in five years, fell to a loss of 254 million euros in the latest quarter.

Heading into his fifth year as CEO, Verwaayen is accelerating his turnaround bid after thousands of job cuts, restructuring and asset sales failed to make the company profitable. Still reeling from the 2006 purchase of Lucent Technologies Inc. which boosted costs, Alcatel is also coping with plunging sales to European carriers and price competition from Asian vendors such as Huawei Technologies Co.

“They have to deliver and fast,” Eric Beaudet, an analyst at Natixis Securities in Paris, said in a phone interview. The job cuts “are a start.”

Alcatel-Lucent fell 6.1 percent to 82.2 cents in Paris, its lowest level in at least 22 years. The stock has lost more than 80 percent since Verwaayen took over as CEO in 2008, plunging 32 percent this year alone.

One-Fifth

At 1.9 billion euros, the company is now worth about one fifth of the $11.6 billion that Alcatel SA paid to acquire Lucent. The biggest European rival, Stockholm-based Ericsson AB (ERICB), is worth about 204 billion kronor ($29.7 billion).

Alcatel-Lucent, rated junk by Moody’s Investors Service and Standard & Poor’s, said its net cash shrank by 517 million euros in the period to 236 million euros. Verwaayen’s efforts to shore up cash flow include a patent-licensing agreement that was signed in February and has yet to bring in revenue. It expects inflows in the second half of this year.

“Failure of the patent portfolio monetization effort and the newly-announced cost restructuring are big red flags for balance sheet trouble,” George C. Notter, an analyst at Jefferies & Co., said in a note. He recommends selling the shares.

Default Swaps

The cost of insuring Alcatel-Lucent bonds using credit- default swaps jumped as much as 142 basis points, or 8.31 percent, to 1,851 basis points. On the basis of these swaps, Alcatel is considered about 9 times riskier than Ericsson. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Former chiefs Pat Russo and Serge Tchuruk, who oversaw the 2006 merger, handed Verwaayen an unprofitable company with a high cost base. Plummeting sales of phone equipment and intensifying competition from Asian rivals Huawei and ZTE Corp. (000063) have since added to Verwaayen’s challenges.

The new job cuts, combined with previously announced reductions, will save 1.25 billion euros by the end of next year, Alcatel-Lucent said.

“For the last two years, we’ve tried to be and stay profitable, unfortunately we’re seeing significant market headwinds,” Chief Financial Officer Paul Tufano told Bloomberg TV in an interview. “We’re taking steps to restore our profitability sustainably.”

Government Pressure

Some competitors have been more aggressive with job cuts. Nokia Siemens Networks, the network venture of Nokia Oyj (NOK1V) and Siemens AG (SIE), said in November it would cut 17,000 jobs, or 23 percent of its workforce.

In France, where Alcatel employs 9,000 of its 78,000-strong staff, Verwaayen faces a tough stance from Socialist President Francois Hollande, elected in May after pledging to block “a parade of firings”. Hollande’s government is trying to persuade carmaker PSA Peugeot Citroen (UG) to revise announced job cuts and has called such plans at drug-maker Sanofi (SAN) “abusive”.

French Industry Minister Arnaud Montebourg is worried about Alcatel’s plans and will meet with Chairman Philippe Camus at the end of August, a government official, who declined to be named, told reporters in Paris today.

Verwaayen addressed workers today in an internal conference call and will have to meet with union representatives next in some countries, including France, where management must inform labor unions about plans to reorganize, which often leads to protracted negotiations with employees.

Asset Sales

Productivity at Alcatel trails Ericsson, whose sales per employee were 19 percent higher last year. Analysts project Ericsson’s profit margin will be 8.4 percent this year, based on estimates for earnings before interest and taxes, compared with 1 percent for Alcatel-Lucent.

Alcatel’s shares fell 20 percent on July 17 when it said it won’t meet its goal of improving its full-year adjusted operating-profit margin this year. Quarterly sales fell 7.1 percent to 3.5 billion euros, in line with the preliminary numbers posted last week. The adjusted operating loss was 31 million euros and net loss was 11 cents a share.

The company said it will exit or restructure unprofitable markets, countries and contracts, as well as intensify efforts to sell businesses.

“It’s all I’m ready to talk about today,” Verwaayen said at a conference in Alcatel’s headquarters. “But that’s not all we’re going to do.”

To contact the reporter on this story: Marie Mawad in Paris at mmawad1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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