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Alcatel 76% Drop on Lucent Means Breakup Not French: Real M&A

Alcatel 76% Drop on Lucent Means Breakup Not French
Signage for Alcatel-Lucent SA sits on display during the 2011 International Consumer Electronics Show (CES) in Las Vegas, Nevada, U.S.. Photographer: Jacob Kepler/Bloomberg

Alcatel-Lucent SA is giving potential buyers a chance to acquire its earnings for free with patents that may be worth as much as the company itself.

Alcatel, France’s largest supplier of telecommunications equipment, lost 30 percent of its market value since reporting sales that fell short of analysts’ estimates last week. The Paris-based company now sells for 10.5 times estimated profit, the lowest valuation in more than a decade, according to data compiled by Bloomberg. Alcatel, once worth almost $100 billion at its peak, has plummeted as it lost money every year since buying Lucent in 2006. It is now valued at $7.8 billion.

Alcatel’s patents alone may be worth twice as much as the $4.5 billion that Nortel Networks’ licenses sold for in a bankruptcy auction in June, according to MKM Partners LP, even as analysts expect Alcatel’s routers and optical fiber products to drive a 59 percent share gain. While French regulations and labor laws make takeovers more difficult, valuing the units separately and accounting for its 18,800 U.S. patents indicates Alcatel may be worth $20 billion, Evercore Partners Inc. said.

“The patent portfolio is one of the hidden assets of value that I don’t think investors have paid much attention to,” Alkesh Shah, an analyst at Evercore in New York, said in a telephone interview. Rather than focusing on Alcatel’s money-losing operations, investors should be “looking at the next piece, which is a very large patent portfolio that has actual value that’s being undervalued by the public market,” he said.

‘Not Impossible’

“Having Alcatel be an important asset to the country may make a breakup sale difficult, but not impossible,” he said.

Simon Poulter, a spokesman at Alcatel, declined to comment on rumors or speculation.

Shares of Alcatel, which traces its roots back to the late 19th century, have fallen every day since its earnings announcement on July 28, when it reported second-quarter sales of 3.9 billion euros ($5.6 billion), less than analysts’ estimates. The decline in the past week has wiped out more than 2 billion euros in Alcatel’s market value.

The result erased almost all of Alcatel’s gain this year. The stock had climbed 55 percent. The MSCI World Technology Hardware & Equipment Index, which includes Alcatel’s biggest competitors, fell 1.3 percent over the same span.

Alcatel is now valued at 5.5 billion euros, versus 111 billion euros in September 2000. The losses in the past decade were exacerbated by its $15.3 billion deal for Lucent Technologies Inc. in December 2006. Alcatel has plummeted 76 percent since completing the takeover as it reported almost 10 billion euros in net losses, data compiled by Bloomberg show.

Breakup Value

Today, shares of Alcatel climbed 3.5 percent to 2.46 euros, snapping a seven-day losing streak.

With analysts anticipating a return to profit this year, they now project that shares of Alcatel will rise to 3.79 euros in the next 12 months, from 2.38 euros yesterday. Alcatel currently trades at 10.5 times its earnings estimate of 0.23 euros a share in 2011, the data show. That’s the lowest since at least 2000, data compiled by Bloomberg show.

By applying the multiples of its closest rivals to each of Alcatel’s units and including the patents, Mike Genovese, a Greenwich, Connecticut-based analyst at MKM Partners, says the company is worth even more. On a per-share basis, he estimates that all of Alcatel’s pieces would add up to 6.51 euros a share, an almost threefold increase from its current price.

That would imply a market capitalization of 15.1 billion euros, data compiled by Bloomberg show.

“There’s a serious discount for being a collection of different product areas,” MKM Partners’ Genovese said in a telephone interview. “The sum-of-the-parts valuation argues that this company is severely undervalued.”

‘Strategic Options’

Alcatel is already shopping around parts of the company. Last month, Alcatel said it is exploring “strategic options” for its so-called enterprise business, which makes office telephones and related equipment.

It began considering a sale or an initial public offering of the business that could raise 1.5 billion euros earlier this year, people familiar with the plans said in April.

Ericsson AB, which is vying with Alcatel to roll out fourth-generation mobile-phone networks to serve devices such as Apple Inc.’s iPhone, examined Alcatel earlier this year as a potential target following the divestment of the enterprise business, according to a person familiar with the plan.

Stockholm-based Ericsson has since decided against pursuing Alcatel after a review, the person said, who wasn’t authorized to speak publicly. Ola Rembe, a spokesman for Ericsson, declined to comment on rumors or speculation.

Patent Portfolio

Alcatel’s patent portfolio, which includes technology to help mobile-phone service providers manage large numbers of small base stations, could also be worth $9 billion alone, double what six companies led by Cupertino, California-based Apple paid for Nortel’s patents, according to MKM Partners.

The bidding contest ended after 19 rounds with a price that was five times more than the $900 million that Google Inc. of Mountain View, California, agreed before the process began.

Alcatel, which inherited Bell Labs from its Lucent deal, has 14,000 approved patents as well as applications submitted for an additional 4,800, according to data compiled by MDB Capital Group, a Santa Monica, California-based investment bank specializing in intellectual property.

Of the 139 publicly traded companies with more than 2,000 patents, Alcatel is one of only three or four specializing in telecommunications that may be willing to sell their licenses, said Chris Marlett, MDB Capital’s chief executive officer.

‘Meaty Stuff’

That’s boosted the value of those patents as companies such as Apple try to buy more exclusive rights to inventions used in almost every device from the iPhone to Google’s Android-based handsets and Research In Motion Ltd.’s Blackberry.

“It’s pretty safe to say that there’s some pretty meaty stuff in there,” Simon Leopold, an analyst at Morgan Keegan & Co. in New York, said in a telephone interview of Alcatel’s patents. “A wealth of inventions all came out” of Bell Labs, he said. Bell Labs, based in Murray Hill, New Jersey, was involved with development of the transistor, lasers, solar cells and satellite and mobile-phone technology.

According to Evercore’s Shah, Alcatel’s patents could push the value of its U.S.-traded American depositary receipts above his price estimate of $10 a share. That’s more than three times higher than its current value.

While breaking up and selling Alcatel’s pieces may be the fastest way recoup shareholder losses, France’s policies to protect local industries and jobs make realizing that value less likely, according to Michael Yoshikami, chief executive officer and founder of YCMNet Advisors, which manages $1.1 billion in Walnut Creek, California.

National Interest

Alcatel “is the type of company that, because of the space they’re in, could be broken up into separate business units,” he said in a telephone interview. “It’s probably the only way to unlock shareholder value.”

Still, “There’s always a concern when you have essentially socialist policies around a company,” he said.

President Nicolas Sarkozy created France’s Strategic Investment Fund during the financial crisis in 2008 to invest in companies considered “strategic” by the government from “foreign predators.” In 2006, France arranged the marriage of energy companies Gaz de France SA and Suez SA to ward off a bid for Suez’s Electrabel unit by Italy’s Enel SpA.

Jasmeet Chadha, a research associate at Sanford C. Bernstein & Co. in London, said its low margins and declining wireless business also make Alcatel less attractive.

Still, Alcatel’s patents may have more value than the company itself because buyers can use them as a “weapon” to fend off emerging competitors to the telecommunications industry such as Apple and Google, said Evercore’s Shah.

“Companies are just now waking up to the value of intellectual property,” said MDB Capital’s Marlett. “When you look at Alcatel, they have one of the largest patent portfolios out there. Alcatel is definitely one of those companies that has the opportunity to monetize a lot of it.”

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