Alcatel-Lucent (ALU) is on a long road to recovery, and the company is making all the right decisions to make a solid turn around. I am impressed by the new leadership and the way they are dealing with the issues. We already know that the company has decided to sell LGS unit. It has been revealed that ALU is in talks to sell its enterprise unit as well. These sales will certainly go a long way in meeting the target of asset sales and getting rid of underperforming assets.
These sales will certainly make the financials of the company more appealing. The sales might not have a big impact - nonetheless, these baby steps are necessary for the company before it starts to gallop again. I did not write about the LGS sales in detail - however, I believe with the recent revelation about the sale of enterprise unit; it is important that I highlight what could be the affects of these sales on the Balance Sheet and the Income Statement.
LGS Unit and Its Impact
First of all, let's talk about the LGS unit. LGS provides secure networking, satellite communications, VoIP, optical routers and other solutions for U.S. national security, defense and advanced research communities. The LGS unit is being sold to a private equity-led investor group. The deal will likely bring in $200 million for Alcatel-Lucent. However, half of the payment is conditional on the performance of the unit. The deal is expected to close in the first quarter of 2014 - as a result, we will see the impact of the sale in about three months.
LGS unit generates around $270 in sales - the sale price of the unit gives an attractive sales-to-price multiple of about 0.75 to the company. The sales to price multiple in the sector is close to 0.5. Based on the sales-to-price multiple of the deal, the ALU is getting a better deal than the sector average. The addition of $100 million to the cash reserves will certainly enhance the balance sheet and cash flows statement. The unit employed close to 700 employees, which will likely have an impact on the cost reduction measures as well. However, LGS unit is not likely to cause a major change in the balance sheet or income statement of the company.
Enterprise Unit Sale
Enterprise unit sale is going to be substantially bigger than the LGS unit, both in terms of the expected cash inflow and the larger size of the business segment. This unit sells telecommunication equipment and services to companies. Total revenue for this segment was close to $1 billion in 2012, and the unit is valued at around $340 million (250 million Euros). However, despite large revenues, the enterprise unit resulted in losses of close to $12 million during the last year. As a result, the sale of this unit will likely have a larger impact on the income statement than LGS unit. Balance sheet will be enhanced substantially due to the addition of cash and removal of an underperforming asset.
The price-to-sales multiple for this unit will be close to 0.35, substantially lower than the multiple ALU will receive for LGS unit. However, it should be kept in mind that enterprise unit is making losses, on the other hand, LGS unit made a small profit during the last year. The company announced to sell the enterprise unit in 2011, but only part of the segment was sold at that time. ALU sold Genesys software for $1.5 billion. The interested party is Unify GmbH & Co. KG, a venture of Gores Group and Siemens (SIE). Unify is looking to buy the segment to better compete with Cisco (CSCO) in North America. The enterprise unit employees 2,800 people - if the deal goes through, it will have a considerable impact on the income statement as well as balance sheet.
Both of these deals will go a long way in achieving the goal of over 1 billion Euros set by the management. In addition, these deals will result in reduction of about 3,500 employees, which will help achieve another target of decreasing the workforce by 10,000, or 14%. As I said at the start of the article, these steps show that the company is going in the right direction to achieve its goal. Furthermore, as I highlighted in my previous article, the business front of the company is making good progress as well. So, it looks like the company will have another good year as it continues its journey back to being profitable.