Alcatel-Lucent SA (ALU) is closer to obtaining financing of at least 1 billion euros ($1.3 billion) from banks led by Goldman Sachs Group Inc. (GS:US) and Credit Suisse Group AG (CSGN) amid a wide-ranging overhaul that will probably require deeper job cuts and major asset sales, people familiar with the talks said.
With discussions still under way, Alcatel-Lucent will need to come up with restructuring plans sufficient to end a six-year streak of mounting losses to reach a deal, the people said, asking not to be identified because the talks are private. Faced with more than 2 billion euros of debt repayments over three years, the company is weighing how to use as collateral its patent portfolio, in part inherited from the Nobel Prize-winning researchers of Bell Labs, the people said.
This isn’t Chief Executive Officer Ben Verwaayen’s first attempt at transforming the former French industrial giant. Headed into his sixth year as CEO, Verwaayen has so far sold smaller assets, cut positions and costs and signed a patent- licensing agreement. These measures have failed to stem an annual cash consumption of 700 million euros on average since the 2006 merger of Alcatel SA and Lucent Technologies.
Alcatel-Lucent shares rose as much as 6.5 percent to 92 cents after Bloomberg News reported the state of the talks, closing at 88 cents in Paris.
After the market close, Moody’s Investors Service cut Alcatel-Lucent’s corporate family rating further into junk, by one step to B3 from B2, and its senior debt ratings by one level to Caa1. The rating company cited expectation that Alcatel- Lucent won’t be able to lower its adjusted cash consumption “materially” below 2011’s level of about 620 million euros.
In the two-tier financing structure under negotiation, Goldman and Credit Suisse would likely be lenders for the first tier, while Citigroup Inc. (C:US) is set to be part of a second group that may include JPMorgan Chase & Co. (JPM:US) and European banks such as Barclays Plc (BARC), the people said. On any given deal, the first-tier lenders often have a coordinating role for the financing and also commit more money to the loans.
JPMorgan had sought to be part of the first-tier and is less likely to lend to Alcatel-Lucent as a member of the second- tier, said two of the people.
Representatives of Alcatel-Lucent, Credit Suisse and Citigroup declined to comment on the talks. Spokesmen at Goldman and JPMorgan were not available for comment.
“Alcatel-Lucent is now using more or less last-resort refinancing options,” said Alexander Peterc, a London-based analyst at Exane BNP Paribas. “Still, substantial disposals or equity issuance will need to be made in order to meet the 2.3 billion euros in 2013 to 2015 redemptions.”
Goldman and Citigroup last month arranged a 500 million euro bond for Alcatel-Lucent, whose operations once ranged from spaceflight to cutting-edge theoretical physics, and which has been hit by declining demand for networking gear as well as Asian competition. The firm isn’t alone in its struggle: Finnish-German rival Nokia Siemens Networks is cutting 17,000 jobs and has sold assets including its optical networks business to restore profitability.
The funding may ease pressure on Verwaayen as he explores how to rejuvenate Paris-based Alcatel-Lucent, whose sales have sunk for five straight quarters.
Alcatel-Lucent shares surged 16 percent Nov. 22 after Bloomberg News reported the company was in talks with Goldman Sachs about obtaining funding in exchange for assets offered as collateral. Still, the stock price has fallen 29 percent this year.
A loan would give Alcatel-Lucent some balance-sheet relief in the face of its debt repayments over the next three years. The company also is in the midst of cutting about 5,500 jobs globally in sales, marketing and administration to reduce expenses. Despite those cuts, announced this year by Alcatel- Lucent, the company is still largely lagging rivals Nokia Siemens Networks and Ericsson AB based on efficiency figures, data compiled by Bloomberg show.
Alcatel-Lucent is weighing the sale of assets such as the unit that produces undersea fiber-optic cables and the division that provides equipment to businesses, people familiar with the matter said last month. Talks on both assets, which may fetch less than 1 billion euros, are at an early stage, the people said then.
To contact the reporters on this story: Matthew Campbell in London at firstname.lastname@example.org; Marie Mawad in Paris at email@example.com; Beth Jinks in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Kenneth Wong at email@example.com; Jacqueline Simmons at firstname.lastname@example.org