Alcatel-Lucent SA (ALU) will sell 1 billion euros ($1.3 billion) of assets and slash costs by another 1 billion euros in a bid by Chief Michel Combes to turn the company around -- something his predecessors tried, and failed, to do for seven years.
The shares jumped as much as 7.4 percent after Combes said that by the time the plan is fully executed in 2015, the network-equipment vendor will have positive free cash flow and be more tightly focused on its most remunerative areas, like ultra-high speed Internet, after cutting out legacy operations.
“I could blame the world for our difficulties, but the truth is we’ve missed product launches and been in too many geographies and businesses,” Combes, who took over April 1 after Chief Executive Officer Ben Verwaayen’s asset sales and firings proved insufficient to stem losses, said today.
Once restructured, Paris-based Alcatel-Lucent, whose cash pile has dwindled for seven consecutive years, will look to cut its debt by 2 billion euros by selling shares on the stock market or through further asset sales, Combes said in a speech to analysts and reporters.
Alcatel-Lucent shares were up 5 percent at 1.48 euros at 3:11 p.m. in Paris, more than double what they were worth when they hit a 23-year low in October.
Under the so-called Shift Plan, Alcatel-Lucent will aim to narrow down business to only the highest-growing segments and refocus research money on so-called IP networking and ultra-broadband access -- network gear made for delivering very-high-speed Internet.
Focusing on fewer businesses makes sense, Jefferies Group LLC analysts George C. Notter and James Kisner wrote in an note. Still, Combes needs to show he can deliver, and thus stand out from a history of failed turnaround bids at Alcatel-Lucent, they said.
“We’re reminded that Alcatel-Lucent has been a perpetual restructurer,” Notter and Kisner said. “It’s hard to really see why this latest restructuring will get executed according to plan and yield the benefits that have been outlined here.”
Alcatel-Lucent said it’s hiring Philippe Guillemot, who previously worked at Cie Financiere Michelin SCA and Valeo SA (FR), as head of operations to help with reorganization. Finance Chief Paul Tufano will step down.
The quest to make the company profitable began right from its formation through the 2006 merger of Alcatel SA and Lucent Technologies.
Combes, 51, is the third CEO to try his hand at revamping Alcatel-Lucent. In more than 20 years in the telecommunications industry, he’s reduced expenses at Vodafone Group Plc (VOD) and overseen finances at France Telecom SA. (FTE) Combes is building on Verwaayen’s last move -- closing a 2 billion-euro loan deal in January to give the company financial headroom in exchange for pledging its intellectual property portfolio as collateral.
Alcatel-Lucent has no short-term liquidity issues, Combes said. He declined to specify which assets will be sold, while saying they’ve been identified.
“We view the new strategic plan as slightly positive for Alcatel credit spreads,” Societe Generale SA analysts Robert H. Jaeger and Priya Viswanathan wrote. “The potential for a more streamlined and better positioned business is offset by near-term execution risks and higher cash restructuring charges.”
Default swaps on Alcatel-Lucent’s bonds -- an indicator of the cost to protect the debt in case a borrower fails to meet its obligations -- declined as much as 3.9 percent to 627 basis points today. That compares with a 12-month record of 1,840 basis points on July 26.
In his first address to investors last month, Combes said Alcatel-Lucent could emulate Ericsson AB, which a decade ago focused on mobile equipment and reorganized its workforce to expand the Swedish company into the world’s largest vendor of wireless networks. Keeping cash consumption under control and focusing on fewer businesses will be key, he had said.
Still, Combes faces competition from China’s Huawei Technologies Co. and ZTE Corp. (000063), which have taken market share from European competitors, falling short only in the U.S. because security concerns prevent them from winning major network contracts.
Alcatel-Lucent, Nokia Siemens Networks and Ericsson eliminated jobs to adapt their business models to aggressive price cuts by Asian vendors, while Huawei said in April it will hire 5,500 people in Europe during the next four to five years.
Alcatel-Lucent will discuss the cost-cutting measures unveiled today with unions, Combes said in an interview on BFM radio. In France, where President Francois Hollande’s Socialist government has taken a tough stance on firings, Alcatel-Lucent has about 9,500 workers, of a total of 72,000 worldwide.
Alcatel, which has a market value of 3.3 billion euros, exited the leading French index Cac 40 last year.
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