WSJ Report on ALU Strategic Plans

June 18, 2013

Terrapin Note- A WSJ report this AM previews ALU strategic update tomorrow AM from new CEO Combes, with a focus in line with our expectations.  The report states that nothing dramatic is planned in terms of business exits or spin offs and the focus will be on basic cost cutting and focus on newer products.  The major positive from our point of view is the exit of CFO Paul Tufano, who is our view has done a consistently poor job of working capital management and was likely a driving force behind the secured loan refinancing that the story also indicates new management would like to repay and unwind.  We don't infer anything around near term financial results from the CFO's reported exit, and also note the reported addition of a new COO. ALU's main challenge remains not in the area of technology or products but in the area of confidence, both customer and investor.  This looks to be an early step in the right direction and we maintain our long 3 view.

 

Alcatel Aims to Overhaul Finances (6/20/13) 

Telecom-Gear Maker Forges Plan to Repay $2.67 Billion in Secured Debt 

By SAM SCHECHNER in Paris and DANA CIMILLUCA in New York 

Alcatel-Lucent SA on Wednesday plans to announce steps aimed at increasing its financial flexibility and the efficiency of its loss-plagued operations, according to people familiar with the matter. 

The telecommunications-gear maker's new chief executive on Wednesday plans to unveil a fresh push to revamp the company's balance sheet, slash costs, shake up management and direct resources away from older products, these people said. 

The company plans to signal that it will soon seek to raise new debt financing—possibly in the form of high-yield or convertible bonds—to begin repaying about €2 billion ($2.67 billion) of secured debt it agreed to borrow in January, one of the people said. 

The loan package, secured by patents and other assets, became a sensitive matter in France, where politicians argued it would lead to the loss of valuable French intellectual property—hence the urgency to repay it. The goal would be to repay the package in two steps over time. 

The new debt also would have longer maturities than the debt it is replacing, this person said. The debt plan, internally dubbed Project Shift, could be followed in the next year or two by a rights issue, a type of share sale common in Europe, of roughly €2 billion, the proceeds of which could be used to help pay off debt, the person said. 

The company is also likely to reiterate a prior asset-sale goal, but new Chief Executive Michel Combes, who has been honing his new strategy for several months, isn't planning a major spinoff or an exit from an entire big business, such as fixed-line networks, the people say. 

An Alcatel-Lucent spokesman declined to comment. 

The bar is high for Mr. Combes. Since the former Vodafone Group PLC executive known for cost-cutting took over Alcatel-Lucent on April 1, the company's stock has risen 34%, as investors have anticipated his new plan of action. But the company's financial position remains weak. In the first quarter of 2013 alone, Alcatel-Lucent burned through €533 million in cash. 

Created in 2006 by the merger of France's Alcatel and New Jersey's Lucent Technologies, Alcatel-Lucent competes in many lines of business. It makes products as diverse as submarine cables, cellphone antennas and the software to calculate monthly phone bills

"The current situation is hardly sustainable in the long term," Mr. Combes told the company's shareholders last month. 

The coming changes include roughly €1 billion of new cost cuts aimed at Alcatel's general and commercial expenses, likely including some job cuts—along with a plan to shift resources away from old products that might be profitable but for which revenue is shrinking, according to people familiar with the matter. That means leaning even more on Alcatel-Lucent's successful Internet Protocol routing business, and accelerating the shift of research spending on wireless and fixed broadband equipment, those people said. 

Some of Mr. Combes's biggest shifts will come near the top of the totem pole. Paul Tufano, who has been Alcatel's chief financial officer since 2008 and chief operating officer since last fall, will be leaving the company to return to the U.S., said people familiar with the matter. Mr. Combes plans to bring in Philippe Guillemot, former chief of car-rental group Europcar, as operating chief, and a search is on for a new CFO, one of the people said. 

Mr. Tufano didn't reply to a request for comment. Mr. Guillemot's potential appointment was earlier reported in French newspaper Le Figaro. Mr. Guillemot couldn't immediately be reached for comment. 

Asset sales remain on the road map as well, the people familiar with the matter said, but aren't likely to be disclosed Wednesday. One of the people said no sale process was under way yet, but one could start in coming months. In the past, the company has explored the sale of its submarine-cables business, and its business selling office-network equipment. 

Bigger changes, such as hiving off the entire wireless business or the fixed-line business, aren't on the agenda, as they likely couldn't survive alone right now, according to one of the people familiar with the matter, who said the idea could be revisited in two or three years. 

Write to Sam Schechner at sam.schechner@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com