December 18, 2012 / 2:56 PM / in 5 years

Alcatel on firmer footing for tough 2013 after loan

PARIS (Reuters) - Alcatel-Lucent ALUA.PA is better armed to confront another year of weak demand for telecom equipment after signing a 1.6 billion euro financing deal and starting massive cost cuts, its chief executive said.

In an interview with Reuters, Chief Executive Ben Verwaayen said the loan from Credit Suisse and Goldman Sachs, under which the group’s 29,000 patents and U.S. business will be put up as collateral, would give him more time to deliver a promised turnaround.

“The balance sheet had started to be a concern, and a certain perception of fragility took hold,” he acknowledged.

“Once that becomes part of the conversation, you have to take action immediately and create certainty. We needed something practical, implementable, and fast, and that’s what we’ve done.”

Verwaayen dismissed concerns raised by the French finance ministry on Monday and Alcatel unions on Tuesday that the financing deal amounted to mortgaging the group’s future by saying that it would retain full ownership of its assets, including the patents.

“We would first have to go into default before anything happens and we have no plans to go into default,” he said, adding that he was open to government proposals if it had a better solution to suggest.


The financing deal is the latest move by the Dutch executive as he seeks to prove Alcatel-Lucent can prosper amid tough competition from low-cost Chinese rivals like Huawei (002502.SZ) and a constant squeeze from cash-strapped telecom operators seeking to reduce expenses.

The group also plans to cut 1.25 billion euros in costs by the end of 2013 via 5,500 layoffs and exiting unprofitable countries and contracts to staunch an average annual cash burn of 700 million euros in the past five years.

Verwaayen did not rule out further cost cuts, and dismissed the charge that Alcatel-Lucent’s move to trim 7 percent of 76,000 staff fell short of rival Nokia-Seimens Networks NOK1V.HE cutting nearly a quarter of staff.

“We could be even more aggressive on cost cuts, but you cannot break the company,” he said, adding that the program would reduce fixed costs by 20 percent.

With financing and cost cuts underway, Verwaayen still faces big challenges to deliver on a promise made upon his arrival in September 2008 to make Alcatel-Lucent a “normal company” with regular profit and healthy cash flows.

“I wouldn’t be here if I didn’t think we could get there,” said Verwaayen.

Much will depend on whether the telecom gear market recovers from a tough 2012 in which it contracted because Chinese operators - hit by a mobile technology switch - spent less and the recession affected European carriers.

Market research firm Gartner estimates that sales of telecom network equipment will contract 4.9 percent to $79.3 billion this year, and rise 2.4 percent to $81.2 billion next year.

For next year, Verwaayan said he did not expect a marked improvement in global operators’ appetite for communications gear. The U.S. will remain strong, fuelled by spending on superfast fourth-generation mobile networks, Verwaayen said, while European operators will stay cautious despite 4G build-outs starting in France, Britain, Germany and the Netherlands.

    “It’s highly unlikely that there will be a significant change in 2013 market trends from 2012,” said Verwaayen.

    “The only place where I can see a shift is China, if they get their regulations and necessary mobile licenses agreed on.”

    Since hitting an all-time low of 71 euro cents in mid-October, Alcatel shares have surged 40 percent, helped by the financing deal and despite being kicked out of France's blue-chip index CAC 40 .FCHI this month.

    The shares were up 7.1 percent to 1.04 euros at 9:42 a.m. ET.

    After aggressively short-selling the stock in the past few months, hedge funds started to reduce their negative bets on Alcatel in mid-November.

    According to Markit, which provides securities lending data, Alcatel had a record 17 percent of its shares out on loan in mid-November, a figure that had dropped to 11 percent this week.

    Short sellers profit from falling stock prices by borrowing shares, selling them, then buying them back more cheaply. The strategy, popular among hedge funds, is risky as it can backfire if the stock starts to rally.

    Asked about the share price and hedge funds betting against the company, Verwaayen responded: “Of course it is a concern. But I think that everyone who is shorting us should think again with this loan in place.”

    Reporting by Leila Abboud and Gwenaelle Barzic; Editing by Helen Massy-Beresford

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