Alcatel Nowhere Near Bottom With Eager Short Sellers

Alcatel-Lucent Nowhere Near Bottom With Eager Shortsellers: Tech
Alcatel-Lucent SA has lost about 70 percent of its value since Chief Executive Officer Ben Verwaayen took over four years ago, and it has become the most volatile constituent of the CAC 40. Photographer: Scott Eells/Bloomberg

Even as shares of Alcatel-Lucent SA trade near a 23-year low, growing numbers of investors are betting they haven’t yet hit bottom.

The unprofitable phone-equipment maker is France’s most shorted stock, based on data compiled by Markit, a financial-information provider in London. Roughly 16 percent of Alcatel’s shares are on loan -- borrowed stock is typically shorted --more than six times the European average, according to Markit.

“I do not see any way out for them,” said Mark Hawtin, head of investments at GAM U.K. Ltd., which manages about $60 billion and is shorting the stock. “The company has a lack of scale in wireless and a high exposure in wireline, which is coming under increasing threat.”

So far, shorting has been a good bet. Alcatel-Lucent has lost about 70 percent of its value since Chief Executive Officer Ben Verwaayen took over four years ago, and it has become the most volatile constituent of the CAC 40.

Short sellers are predicting that Verwaayen’s recovery plan, which includes thousands of job cuts, will fail to revive the Paris-based company as European demand for switches, antennas and base stations wanes and Asian rivals like Huawei Technologies Co. eat into the market.

Since taking over in 2008, Verwaayen hasn’t reached his goal of making Alcatel-Lucent sustainably profitable. Former chiefs Patricia Russo and Serge Tchuruk, who oversaw the 2006 merger of Alcatel SA and Lucent Technologies Inc., were driven out by a series of profit warnings that wiped out half of the company’s market value in the year after the merger.

Loss Looming

Short positions have increased as Alcatel prepares to release its results on Nov. 2, with the company projected to report a loss for the third quarter. In short sales, investors borrow stock and sell it, expecting to profit by repurchasing the shares later at a lower price.

At least five investors have boosted Alcatel-Lucent short positions in the past month, filings with French market regulator AMF show. Odey Asset Management LLP, Ako Capital LLP, AQR, TT International and Marshall Wace LLP have together increased their short positions by about 2.5 percentage points to 6.2 percent of Alcatel-Lucent’s shares.

Representatives from the five money managers declined to comment on the investments.

Borrowed Shares

Alcatel-Lucent will report a third-quarter loss of 148 million euros ($192 million) on sales off by 6.4 percent to 3.55 billion euros, the average of estimates compiled by Bloomberg show. Of 29 analysts who cover the stock, 13 recommend holding, 12 advise selling and four say buy, Bloomberg data show.

Alcatel-Lucent shares traded in the U.S. rose 2.4 percent to $1.07 at 11:06 a.m. New York time. Last month, the stock sank to its lowest level since at least 1989.

Short-selling isn’t always made public. The French market watchdog reports changes in short positions only when a stake of at least 0.5 percent of a company is at play. To make up for this partial data, analysts look at borrowed shares as an indicator of short-selling activity.

About 87 percent of Alcatel-Lucent shares that are available for lending are already on loan, according to Markit data. That compares with an average of just 11 percent for European companies.

Job Cuts

In a market that has been rocked by Asian rivals making cheaper network gear, Alcatel-Lucent is betting that closer ties with carriers will help it land new contracts. Verwaayen has revamped the company’s research units to get new products to market faster, and has allowed carriers to participate in the development process.

Those moves haven’t been enough to stanch the bleeding. Alcatel-Lucent said Oct. 18 it will cut its French workforce by about 15 percent as part of a 750 million-euro savings plan outlined in July. The program includes shedding 5,500 jobs worldwide out of a total of 78,000.

Alcatel-Lucent’s cash has diminished by an average of 700 million euros per year since 2007, and probably shrank by 195 million euros in the third quarter, the average of five estimates compiled by Bloomberg.

It had net cash of 236 million euros at the end of June and targets a “strong positive net cash position” at the end of the year. Alcatel’s debt maturities show it will have to pay back 837 million euros in 2013, 462 million euros the following year, and 1 billion euros in 2015.

Improving its cash position, through asset sales or otherwise, is central to the performance of Alcatel’s stock, according to Odon de Laporte, an analyst at CA Cheuvreux in London. He projects Alcatel stock will underperform the market and estimates it will be worth 90 cents in six months.

Alcatel shares, de Laporte said, “won’t be investable until the issue of liquidity is fixed.”

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