Business - Alcatel-Lucent could dump mobiles to end the pain

PARIS: The new chief executive at Alcatel-Lucent could stop the company's pain and earnings erosion by exiting the mobile networks business that has
wrecked profitability since the 2006 merger. As the recession bites deep into the group's remaining growth activities, Ben Verwaayen could be tempted to dump an investment-hungry business with no prospect of significant orders before 2010 as operator clients rein in spending.

But abandoning the mobile division would set the seal on the failure of a $34 billion transatlantic mega-deal that has left the group worth $5 billion, barely three times the amount it targeted in annual synergies alone, analysts said.

The shares have lost 66 per cent this year after a 55 percent decline in 2007. The company is set to unveil a major strategic review on December 12, when investors will learn how the world's third largest telecoms gear maker plans to halt losses as its core carrier market crumbles around it.

"The mobile business is too small, they will probably never make any money from this activity," according to Bernstein Research analyst Pierre Ferragu. For Thomas Langer of West LB, Alcatel-Lucent "should exit the mobile market" and focus on "the fixed story: copper to fibre optics, software and integration.

Alexandre Peterc of Exane BNP Paribas disagreed: "Unlike other observers, I do not expect Alcatel to dispose of its mobile activities, that would be suicidal." Alcatel-Lucent must remain an integrated supplier of both fixed and mobile gear if it wants to remain a "top-rank" player, he said.

While the company's wireless business remains a distant third place behind behind Ericsson, and Nokia and Siemens AG joint venture, Nokia Siemens Networks, it generated 30 per cent of 2007 group sales and "is still a cash cow," according to Peterc.

"If I were France Telecom and I had an equipment maker that can't even provide an end-to-end fixed-line and mobile solution, I would not even talk to them," he said. "You don't just lose the mobile business, you lose the fixed business too."

If the company is to retain the division, several analysts said Verwaayen needs to produce a clear road map that will see R&D money stripped from obsolete technology such as CDMA to preserve cash and fund the next-generation Long Term Evolution (LTE) standard in time for the upturn.

"We estimate this company lost over 600 million euros in their 3G business in 2007, simply bringing that to a breakeven would improve its operating margin on a clean basis from 2 pe rcent this year to 6 per cent," said Kulbinder Garcha of Credit Suisse.

For Garcha, Alcatel-Lucent "has already swallowed a lot of the pain and amid the lack of any credible buyer, "the cost of shutting it down would be very significant." He said the "real news" in December will be how much cost they can cut and where they can find further efficiencies pending the long wait for a recovery in the carrier market.

The global wireless gear market faces a crash landing next year, with a decline in sales of up to 12 per cent by Garcha's estimate, but Alcatel-Lucent will be able to stay in one piece and address its cost base thanks to a sound cash position.

The group expects to net 1.6 billion euros tax free from the sale of its 20.8 percent stake in Thales and Peterc calculates it has a "cash cushion of almost 6 billion euros, with 2 billion in short-term instalments on the debt over the coming three years."

This breathing space means Verwaayen can avoid the upheaval of a major disposal and concentrate on slimming down group costs and coaxing up a share price that has dropped 60 percent since his appointment in September. Analysts approved of the management shake up in recent weeks that has seen what Peterc calls a "cost-cutting profile" replace warring French and US factions with roots too deep in the original two halves of the group to bring off the pruning that was required.

Last week it named Paul Tufano as new chief financial officer. "They should stay away from reorganisations, they have done too many in the company. They have to focus on execution, the less reorganisation the better," said Jouni Forsman of Gartner Research.