Alcatel-Lucent SA (ALU) is in talks with Goldman Sachs Group Inc. (GS) about obtaining a loan to strengthen the unprofitable network equipment vendor’s balance sheet, according to people familiar with the situation.
Under terms still being discussed, the New York-based investment bank would grant Alcatel-Lucent funding of an undisclosed amount, while the Paris-based firm would offer some of its assets as collateral, said the people, who asked not to be named because the deal isn’t final.
Alcatel-Lucent shares surged as much as 8.3 percent to 1 euro ($1.29) in Paris trading today, after rising 16 percent yesterday. Before that gain, the stock had dropped 34 percent this year and was trading near a 23-year low.
“This deal would buy Alcatel-Lucent time,” Andy Perkins, a London-based equity analyst at Societe Generale SA, wrote in a note. “It does not alter the fact that the company remains subscale in most markets.”
Mounting losses and a steady cash burn have pushed Chief Executive Officer Ben Verwaayen, heading into his sixth year in the job, to explore options ranging from asset and patents sales to asset-backed financing. The potential transactions show how Alcatel-Lucent, once a French industrial giant with operations from aerospace to cutting-edge theoretical physics research, is poised to shrink further as Chinese competition and slowing demand for network gear slam its earnings.
Sales of assets, such as a division that manufactures undersea fiber-optic cables, and Alcatel-Lucent’s so-called enterprise unit, which provides equipment to businesses, are being explored, people familiar with the matter said.
Both the undersea cable and enterprise discussions are at a very early stage, and Alcatel-Lucent hasn’t hired an investment bank to advise on the potential sales, the people said. Both assets may fetch less than a billion euros, they said.
“Asset disposals would result in a cash injection, but they would take some time,” according to Eric Beaudet, a Paris- based equity analyst at Natixis. How quickly a solution can be implemented will impact the share price, Beaudet said.
An official at Alcatel-Lucent declined to comment on possible asset sales and on plans for asset-backed financing. A spokeswoman at Goldman declined to comment.
Selling some assets and secondary patents may be part of the solution to strengthen Alcatel-Lucent’s balance sheet, as well as using some assets as collateral for new financing, Chief Financial Officer Paul Tufano has said. The company’s enterprise, strategic industries and submarine businesses were placed under Tufano’s management in September, separate from Alcatel-Lucent’s other network operations.
Verwaayen has made his mark on Alcatel-Lucent in the past by selling assets. He sold a stake in the aerospace manufacturer Thales SA (HO) in 2009 and last year agreed to sell the Genesys call- center software unit to Permira Advisers LLP for $1.5 billion.
Still, amid weak sales and a difficult economic environment, divestments and thousands of job cuts have failed to stem losses at the company, which has burned through about 700 million euros of cash each year since it was created in 2006 by merging Alcatel SA and Lucent Technologies.
It costs 2.7 million euros in advance and 500,000 euros annually to insure 10 million euros of Alcatel’s debt for five years, signaling a 72.5 percent chance of default within that time, according to CMA. That compares with 2.5 million euros upfront yesterday and 2.9 million euros the day before.
A possible secured loan from Goldman would further subordinate the company’s unsecured debt, which is not necessarily good news for investors already holding bonds with maturities of four or five years, said Juliano Torii, a credit analyst at Societe Generale.
To bring in cash, Alcatel is also exploring how it could use its patent portfolio, largely inherited from U.S. research facility Bell Labs, people familiar with the matter said. Options include licensing agreements and asset-backed financing.
In February, Alcatel-Lucent announced a licensing agreement with licensing syndicate RPX Corp. (RPXC) on 29,000 patents, including voice-recognition and video-conferencing technology, which Alcatel-Lucent had said would deliver several hundred million euros. Alcatel-Lucent has yet to disclose any revenue from the contract. RPX is still trying to license Alcatel-Lucent patents but lost exclusivity to do so, said two of the people.
This month, the company appointed former-Nokia Oyj executive Craig Thompson to head a new business unit created to manage the patent portfolio separately.
A series of lawsuits over intellectual property between companies including Apple Inc. and Samsung Electronics Co. have driven up the value of patents worldwide, prompting companies with long histories of research and development to explore ways to monetize their work. Google Inc. (GOOG) cited the patent portfolio of Motorola Mobility Inc. as a key factor in its decision to acquire the handset maker for $12.5 billion last year.
Alcatel-Lucent is the ninth-most short sold stock in Europe and the second-most short sold in France, based on data compiled by Markit, a financial-information provider in London. Altogether, 15.6 percent of Alcatel-Lucent’s shares are on loan, an indication of short-selling, because borrowed stock is typically shorted, according to Markit. Short-sellers bet that a stock will decline in value, usually by selling shares they borrow, then buying them back at a lower price.
Alcatel-Lucent isn’t alone among providers of network gear looking to sell assets and cut costs. Nokia Siemens Networks is seeking buyers for its business support services unit, which manages billing and other processes for mobile operators, and last year announced plans to cut 17,000 jobs, almost a quarter of its headcount.
Meanwhile, slowing spending on network equipment by cash- strapped mobile operators is even affecting China’s Huawei Technologies Co. and ZTE Corp., which reported lower profit and a loss, respectively, this year.