There is a major buzz around Alcatel-Lucent (ALU) at the moment, and rightly so. The company is on the right path and the decisions by the new management are bringing in substantial benefits. The stock has been added back to CAC-40 - this might be seen as a small symbolic step but it is a massive one for the company in my opinion. When the company lost its place in the CAC-40, the majority of the investors believed that the end of the company was near. However, gaining its spot back in the CAC-40 shows how far the company has come in the previous twelve months and the market has shown full confidence in the decision of the new management. There are a number of other more important and concrete developments that should excite ALU investors - I will talk about these developments one by one in the article.
Focus on IP and Ultra-Broadband Making Good Progress
Management at ALU believes that the dynamics of the networking industry are changing rapidly and specialization is the way to move forward. As a result, the company has put all of its focus on the IP and ultra-broadband segment. As I have mentioned in my previous article, the industry is largely saturated and there is intense competition to gain as much market share possible. At the moment, the most profitable region for the company is the North America. However, the recent moves made by the company will give it significant exposure in the largest mobile broadband region in the world.
Alcatel-Lucent will supply China Telecom next-generation 4G technology for a nationwide trial of high-speed broadband. The company will provide 9,892 base stations in 12 Chinese provinces under the deal. The size of the deal is similar to adequately cover the country of the size of France. In addition, the company will also provide "lightRAdio", which was developed by China Mobile and ALU - this is similar to a small mobile antenna for urban and indoor areas. China is the world's biggest and fastest growing market when it comes to mobile broadband - the growth is more than 50% per year, and China Telecom has more than 181 million. ALU has already secured some portion of over $3 billion worth of 4G contracts from China Mobile, a company with over 750 million subscribers.
The Chinese manufacturers, Huawei and ZTE pose a big threat to the European manufacturers in Europe, and local manufacturers also swept more than half of the contracts, but ALU's 11% share in these contracts shows that the company is ready to compete with these giants in their own backyard. Alcatel-Lucent will provide China Mobile with small-cell solutions for its TD-LTE network, and it will be tested in several high-population cities. Alcatel-Lucent has an amazing research and development team, which can give it an advantage over the Chinese competitors - on the other hand, Chinese manufacturers have been mainly competing on price.
Furthermore, ALU's vectoring technology is also being deployed by operators - Bezeq, one of Israel's telecom provider will use Alcatel-Lucent's help to provide faster broadband on its existing copper lines. Bezeq has more than 1.2 million subscribers. Overall, the strategy on the business growth front is going according to the plan and revenue growth will likely start to pick up over the next near.
Shift Plan Going Ahead Smoothly
Along with a reduction in cost and downsizing, shift plan also included refinancing of debt in order to decrease the financial cost. The company is going to issue senior unsecured notes worth $650 million through AlcatelLucent USA, a subsidiary of the company. These notes will be due in 2017 and will be given to the qualified buyers. The proceeds from these notes along with the some internally generated cash will be used to redeem in full $931 million aggregate principal amount of 7.75% convertible trust securities issued by Lucent Technologies.
Let's see some background on these trust securities - in 2002, Lucent Technologies Trust sold 7.75% cumulative convertible trust preferred securities for an aggregate amount of U.S. $1.75 billion. The Trust used the proceeds to purchase Lucent Technologies Inc. 7.75% convertible subordinated debentures due March 15, 2017, which represented all of the Trust's assets. Lucent Technologies Inc. (now known as AlcatelLucent USA Inc.) owns all of the common securities of the Trust and as a result consolidates the Trust.
Alcatel-Lucent may redeem the debentures, in whole or in part, for cash at par. To the extent Alcatel-Lucent USA redeems debentures; the Trust is required to redeem a corresponding amount of trust preferred securities. The ability of the Trust to pay dividends depends on the receipt of interest payments on the debentures. Alcatel-Lucent USA has the right to defer payments of interest on the debentures for up to 20 consecutive quarters. If payment of interest on the debentures is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period.
However, deferred interest accrues at an annual rate of 9.25%. At the option of the holder, each trust preferred security is convertible into Alcatel-Lucent ADSs, which is unlikely to happen as the stock is trading way below the conversion price ($24.80). The transaction will allow the company to bring down its financial costs - the efforts on the operational front as well as on the financial front are encouraging and the company will achieve the targets under its shift plan for the year.
I have long maintained that ALU is an attractive long-term investment if investors are willing to be patient. The stock has made huge strides over the past year, however, it is still not out of the trouble completely. The decisions by the new management are positive and the company is moving in the right direction. I believe ALU investors should sit and be patient and the company will certainly reward its shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.