I am not sure why the market was so excited about Alcatel-Lucent's (ALU) recent quarterly results, but the numbers were not that good. They were a little bit better than what the market expected and yes, they were a little bit better than previous quarters, but nonetheless they were nothing to cheer about. And they were certainly not a reason for the double digit spike in the stock after the announcement.
And while I agree that ALU has not looked better in years, that still isn't enough for me to get excited or even bullish about the stock. Sure I was much more bullish at the bottom when the stock was at $1, but that's because back then ALU was a special situation play, where the market had oversold the stock thinking it will go out of business. Today ALU is past that and has to live up to investor expectations. And that's a whole different ballgame.
On my last article on the company I said that ALU did not have a lot of financial breathing space and that my biggest fear was that the French government might step in and dilute shareholders.
My biggest fear is that the French government might decide to take a stake in the company via a private placement of common stock, and thus dilute current shareholders. And while the market does not seem to be worried about such an outcome at the moment, it is something investors need to keep in mind.
Well I was wrong about the French government (so far), but I was not wrong about its financial health and that the company might dilute shareholders. As the company announced today, it plans to raise 955 million euros ($1.3 billion) from shareholders and $750 million from a high-yield bond to cut debt and drive what ALU's CEO has called "a last-ditch effort to save the group". Let me repeat that, "a last-ditch effort to save the group".
The company will be issuing around 460 million shares at 2.10 euros a share, a significant discount from the 2.90 euros the shares are currently trading on the Euronext Paris exchange. Since ALU has about 2.3 billion shares outstanding, anyone doing the math will see that's about a 20% dilution. That means that shareholders now have a 20% less stake in the company than they had from the previous trading session.
Also, the fact that the new shares were marked down so much, testifies to the fact that institutional investors who participated in the offering wanted a substantial margin of safety in order to buy. I am sorry, but that's not a good sign.
The question is, will this be the last round of dilutive funding that shareholders will have to endure? We do not know, but my guess is no. As per the company's most recent balance sheet, the company has about 2.35 billion euros ($3.2 billion) in working capital and about 2 billion euros ($2.7 billion) in equity. So even with the current offering, the company still does not have a solid and comfortable layer of equity and working capital on the books.
Sure, things are now a lot better because working capital will reach about 3.3 billion euros, but please take into account that this came at a cost to current shareholders. It was not a result of the company's turnaround effort. Also, the company is going to lay off about 10,000 people and that will also cost a pretty penny.
I continue to be skeptical of the long term prospects for ALU. While I think the company will survive, my question is if it's worth to be invested in the company over the long term from today's levels. And the reason why I ask this question is not because of the company's product mix, but because of its financial health.
And while the company is in much better shape than when it was at $1, it might need several more capital increases before we can say that company is out of financial danger. So the risk as I see it, is not the risk of the company going bankrupt, but of shareholders being continuously diluted for several more years. And in my book, that means stay away.