UPDATE 4-Alcatel picks former Vodafone exec for new recovery bid

Fri Feb 22, 2013 7:50am EST

* Michel Combes to become CEO on April 1

* Previously head of Vodafone Europe, CFO of France Tel

* Canada's Jean Monty named vice-chairman of board

* Alcatel unable to deliver profit, cash since 2006 merger

* Shares rise 3 percent, then fall back

By Leila Abboud

PARIS, Feb 22 (Reuters) - Loss-making telecom equipment maker Alcatel-Lucent has picked Michel Combes, the Frenchman who steered Vodafone's European business through the financial crisis, to spearhead the turnaround that has eluded it for years.

Combes, 51, and a former finance chief at France Telecom , will take over as chief executive on April 1 from Ben Verwaayen, who has led Alcatel-Lucent for five years but failed to deliver a long-promised recovery despite deep cost cuts.

The French-American group, which plunged to a net loss of 1.37 billion euros ($1.8 billion) in 2012, has been hit hard by the rise of low-cost Chinese competitors in the past decade and trails market leaders Ericsson of Sweden and Huawei of China in size and market share for mobile equipment.

Combes had been picked last year to head Vivendi's SFR, France's second-biggest mobile operator and another business seen as needing a revamp. But that appointment was aborted after a management shake-up at the parent company.

Analysts said Combes' experience tackling a struggling business at mobile phone operator Vodafone, as well as his time at partly state-owned France Telecom, would stand him in good stead for a job likely to involve deep cost cutting in France, where the Socialist government has been critical of lay-offs.

His task will not be easy.

"Combes is a good choice since he has a 20-year track record in telecoms and knows the French political establishment well," said Alexander Peterc, analyst at Exane BNP Paribas.

"He has experience managing difficult situations like the recession that hit southern Europe when he was at Vodafone. But the challenges at Alcatel are of a different magnitude: everything easy has already been tried and nothing has worked."

At Vodafone from 2008 to 2012, Combes undertook a 2-billion-pound ($3 billion) programme of cuts in staff, marketing and procurement to cope with a slump in consumer spending in recession-hit countries like Spain and Italy.

"After Combes took over at Vodafone Europe, it improved its competitive position in Europe, stopped losing market share and demonstrated strong cost control, though net cost reduction was limited," Goldman Sachs analysts wrote in a research note.

As a board member at Vodafone, he was also seen internally as a logical, dispassionate voice, unafraid to dissent in debates on thorny strategic problems such as mobile pricing and keeping discounts on smartphones at the expense of margins.

But after years as an lieutenant to Vodafone Chief Executive Vittorio Colao, Combes was eager for a chief executive role.

Alcatel-Lucent shares rose as much as 3 percent before falling back to trade down 0.8 percent at 1.13 euros by 1216 GMT. France's benchmark stock index was up 1.9 percent.

THE TASK AHEAD

Since it was formed through a merger in 2006, Alcatel-Lucent has gone through two chief executives and not been able to reach sustainable profitability or cash flow despite cost cutting and paring its product portfolio.

The group has strong technology in fixed broadband, optical transmission gear in the backbone of networks and fourth-generation mobile (4G), but has suffered from the costs of maintaining a broad product portfolio.

The U.S. market, which is essentially closed to Chinese competitors and where operators have invested heavily in 4G, has saved it in recent years as it lost share in Europe and Asia.

The challenge facing Combes, who will be Alcatel-Lucent's first French chief executive since its 2006 formation, will be to continue a 1.25-billion-euro cost-cutting plan including 5,500 layoffs while not falling behind rivals in research and development.

He'll also have to contend with the political fallout of restructuring in France.

The government has remained largely silent on the layoffs. But it did seek, unsuccessfully, to intervene in December when Alcatel-Lucent was finalising a 2-billion-euro financing package that required putting up 29,000 patents as collateral for lenders concerned about the group's viability.

At that time, Finance Minister Pierre Moscovici and other officials looked for alternative options before the loan went ahead, including asset sales or an investment by France's sovereign wealth fund, the FSI.

Asked on Thursday at a press briefing whether France could take a stake in Alcatel-Lucent, Moscovici said it was not the "right time or place to comment on that".

Combes learned to navigate through political waters while finance chief of France Telecom, which is 27 percent owned by the state. He oversaw restructuring alongside then CEO Thierry Breton, although he irked some investors with a capital increase to fund a costly mobile expansion in Spain.

Alcatel-Lucent also named Jean C. Monty as vice-chairman of the board, effective immediately. Monty, 64, is a former chairman and chief executive of Bell Canada Enterprises.

Monty cut his teeth as boss from 1993 to 1997 of Nortel Networks and was credited with saving it after a financial crisis. Nortel later became a casualty of many of the same forces of international competition now buffeting Alcatel-Lucent, and filed for bankruptcy in 2009.

Philippe Camus, Alcatel-Lucent's current chairman, is likely to stay on since he has requested another three-year mandate, said a spokesman for the company. The mandate must be approved at the next shareholder meeting on May 7.