Today’s buy idea is a beleaguered European telecom whose stock price may finally be starting to reflecting the turnaround going on at the company. There are still bumps in the road ahead, but aggressive value investors may be rewarded long-term for betting on this company while it’s still down.
Alcatel Lucent SA (ALU)
from Global Investing
We need to find a new investment to sop up our loot. Here is an oddball idea called Franco-American Spaghetti: Alcatel Lucent, ALU. It has been rising from the mat lately, having tripled since new management moved in, partly speculation that our Nokia will bid for the company’s patents and production to build out its telephone network equipment businesses, and partly thanks to beating estimates in Q2 and Q3 this year.
It is a turnaround play and risky. It has lost money for four of the past five years, hurt by Asian competition. ALU is moving toward focusing its R&D on networking and ultra-broadband under its “Shift Plan.” Its existing IT portfolio is hugely valuable but the R&D innovation is high-risk. Achilles Research writes that its existing patents are worth as much as $3/share (euros 2.3). Writing at Seeking Alpha, the anonymous analyst bravely forecasts that ALU is worth $8/share and names it a “contrarian buy.” That may be what the French call “un pari stupide” but we are going in.
Still hanging over ALU are fears that it will not be able to streamline its manning levels because of French labor laws. Alcatel, the French part of the business, is dominant; Lucent, the U.S. side (the former Bell Labs) is the tail that cannot wag the dog.
Getting rid of French management has not yet resolved all issues but CEO Michel Combes, hired from Vodafone of Britain (if French) is at least starting work on the ALU debt load. Today ALU began to raise $2.7 billion by selling new shares and new debt. The share issue, worth euros 955 million at euros 2.1/share, not including a green shoe option, will hurt existing shareholders because they are below its Friday closing price of euros 4.19. The stock fell off sharply in Paris trading today.
The bonds are dollar-denominated, $750 million in junkland and another euros 500 million in bank credit facilities, which will enable ALU to slash its net debt, which closed Sept. at euros 1 billion. Moreover, it gives ALU back its IT portfolio as it had to pledge its patents to raise money from Goldman Sachs and Credit Suisse three years ago.
The new share issue under French rules gives existing holders subscription rights and BofA Merrill Lynch and Deutsche Bank are among the underwriters along with French institutions. Apart from fear of France, ALU fell because the BlackBerry deal in Canada collapsed, and because of news which follows from NOK. Buy at $3.80 or less.
Vivian Lewis, Global Investing, www.global-investing.com, 212-758-9480, November 4, 2013