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France Said to Consider Alcatel Stake After Patent Deal

February 22, 2013

France Said to Weigh Alcatel Investment Among Possible Options

A government investment in Alcatel-Lucent would be a new chapter in the history of a one-time French industrial giant, with former operations ranging from spaceflight to cutting-edge theoretical physics, that’s been weakened by Asian competition and slower spending on network equipment by mobile carriers. Photographer: Chris Ratcliffe/Bloomberg

The French government is weighing options including an investment in Alcatel-Lucent SA (ALU) as it looks to protect the unprofitable network equipment maker’s patents, people with knowledge of the deliberations said.

Taking a minority stake in Alcatel-Lucent, potentially through the Fonds Strategique d’Investissement state vehicle, is among alternatives being considered by the French administration, said a government official, who asked not to be identified as he wasn’t authorized to be cited by the media. Such a move would give France more influence at the company after a 2 billion-euro ($2.6 billion) financing deal criticized by officials, other people familiar with the matter said.

The French government has been considering options for Alcatel-Lucent since the December announcement of the loan, underwritten by Credit Suisse (CSGN) Group AG and Goldman Sachs Group Inc. (GS:US), that’s secured in part by the manufacturer’s intellectual property portfolio, the people said.

Other plans that have been considered by officials include encouraging a merger between Paris-based Alcatel-Lucent and rival Nokia Siemens Networks, or an investment in Alcatel- Lucent’s undersea cable business, said the people.

The state may ultimately decide not to take a stake in the company or intervene, the people said. Alcatel-Lucent today announced that Michel Combes, a former Vodafone Group Plc executive, will replace Chief Executive officer Ben Verwaayen, who stepped down this month after a three-year turnaround plan failed to return the company to profit. The selection of a new Alcatel CEO may help speed a government decision, people familiar with the situation have said.

Alcatel-Lucent shares fell 1.8 percent to 1.12 euros in Paris today.

New Chapter

A government investment in Alcatel-Lucent would be a new chapter in the history of a onetime French industrial giant, with former operations ranging from spaceflight to cutting-edge theoretical physics, that’s been weakened by Asian competition and slower spending on network equipment by mobile carriers.

The FSI, which acquires minority stakes in companies it deems crucial to France’s competitiveness, has invested in businesses such as smartcard manufacturer Gemalto NV (GTO) and Nexans SA (NEX), a supplier of power and fiber-optic cables.

A spokesman for the French finance ministry declined to comment. Representatives of Alcatel-Lucent, Credit Suisse and Goldman Sachs declined to comment. A representative of the FSI couldn’t immediately comment.

Struggling Companies

Alcatel-Lucent, created with the 2006 merger of Alcatel SA with U.S.-based Lucent Technologies, was removed from France’s benchmark stock-market index in 2012 as its value slipped to less than 2 billion euros, a decline of 70 percent since 2008. Since the deal, the combined firm has accumulated about 10 billion euros in losses, while its cash reserves have dwindled by an average of 700 million euros a year.

Last month, the French government unsuccessfully sought alternative solutions for Alcatel-Lucent’s financing needs, according to union representatives. President Francois Hollande’s socialist government has regularly opposed attempts by struggling companies to shut facilities or restructure assets, fighting job cuts at Peugeot SA (UG) and ArcelorMittal.

In late January, Alcatel-Lucent said it had expanded its initial financing agreement by 400 million euros, achieved an average price decrease of 90 basis points, and removed financial covenants, making a default the primary trigger for giving up its collateral. In a statement, French ministers welcomed the better terms and took partial credit for the adjustment after the government “mobilized itself and examined, in cooperation with the company, all the feasible options.”

Patent Portfolio

Nonetheless, the changes to the terms were due largely to better market conditions following the avoidance of the so- called fiscal cliff in the U.S., according to people familiar with the transaction. The initial conditions, on which discussions with Alcatel-Lucent Chief Financial Officer Paul Tufano began in October, were reflective of the more risk-averse market environment of the time, the people added.

Alcatel-Lucent’s patent portfolio, partially inherited from New Jersey’s storied Bell Labs research center, touches on video-conferencing as well as data compression and transfer.

That intellectual property makes up a significant proportion of Alcatel-Lucent’s available assets, and was thus the logical collateral for a company unable to raise funds through a share sale and facing high costs for unsecured lending, the people said.

Alleged Infringements

Patents with applications for mobile technology have gained in value as companies including Apple Inc. and Samsung Electronics Co. repeatedly take each other to court over alleged infringements. Google Inc. cited the value of Motorola Mobility’s patent portfolio as a primary justification for its $12.5 billion acquisition of the smartphone maker in 2011.

Negotiations on the financing deal followed a period of turmoil at Alcatel-Lucent, whose board had been informally seeking a replacement for Verwaayen for about six months, people familiar with its deliberations said this month.

The board took a very cautious approach to the financing package, meeting regularly throughout January and pressing Verwaayen and the banks to examine alternatives that would reduce Alcatel-Lucent’s risk of losing its collateral, the people with knowledge of the transaction said.

Even with the government as a major backer, Alcatel-Lucent faces an uncertain future in a highly competitive industry. China’s Huawei Technologies Co. and ZTE Corp. (000063) have taken market share from European competitors, falling short only in the U.S., where security concerns prevent them from winning major network contracts.

Alcatel-Lucent has held informal discussions on an eventual merger with Nokia Siemens Networks, the telecommunications equipment venture of Nokia Oyj (NOK1V) and Siemens AG (SIE), people familiar with the matter said this month. Such a deal would reduce the number of major European firms in the sector to two, along with Sweden’s Ericsson AB.

To contact the reporters on this story: Matthew Campbell in London at mcampbell39@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Gregory Viscusi in Paris at gviscusi@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net; James Hertling at jhertling@bloomberg.net


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