Alcatel-Lucent: An Asset Based Opportunity

| About: Nokia Corporation (NOK)
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Alcatel-Lucent (ALU) has been trying to find a way to monetize its patent portfolio for a long time. In fact, it has been one of management's top priorities for some time. Why Alcatel-Lucent has been unsuccessful in monetizing its patent portfolio so far is a big question, taking into account Bell Labs' rich history of innovation. And it has also been a question for the market, which is one of the reasons that the stock has been hovering at the $1 mark lately.

So when news comes out that Goldman Sachs (NYSE:GS) might provide financing to Alcatel-Lucent in exchange for patent assets as collateral, heads rise and the market gets interested in the stock.

Most companies don't go broke because they lose money, but because they lose access to market funding and find themselves in a liquidity bind. In other words, in most cases it's an issue of liquidity and not of negative equity. And there is only one way to solve a liquidity problem - you either sell assets or raise capital.

When liquidity conditions are such that the market won't lend you money or, won't lend you at a price you can afford or want (or the quantities you want), then the only other thing you can do is a secondary offering. But when the market realizes this (as has been the case with Alcatel-Lucent), then your stock drops like a rock because investors head to the exits fearing dilution.

If you can't raise capital via a secondary offering, bondholders take over the company. In either case, your stock tumbles because all options lead to the annihilation of current stockholders.

In other words, putting aside the issue of Alcatel-Lucent losing money, the other major concern has been that shareholders might face mass dilution and total annihilation from a debt to equity swap caused by a liquidity squeeze.

Alcatel-Lucent has almost 30,000 patents and 15,000 patent applications pending. The question is, what can it get for this patent portfolio? Taking into consideration the patent wars going on these days and the fact that companies pay billions to each other to get access to these patents, the logical answer is that these patents should be worth a lot.

But given that the company has a cash burn of about 600-700 million euros [$779M-$909M] a year and that several billion euros in debt will mature over the next several years, it might face a liquidity problem, even though its patent portfolio might be worth billions.

As per the company's Q3 report, it had 3 billion euros in cash and cash equivalents and about 1,7 billion euros [$2.2B] in marketable securities, for a total of cash, cash equivalents and marketable securities of 4,7 billion euros [$6.1B].

At the same time it has a total of 10,7 billion euros [$13.9B] in current assets . Its total current liabilities are 8 billion euros [$10.4B], so theoretically it is still above water and does not face an immediate liquidity problem.

However it always pays to plan ahead, because if the cash burn continues and with several billion in bonds coming due over the next several years, if nothing is done, there will be a problem.

With total financial debt of about 4,8 billion euros [$6.2B], the question is how much money does the company need to raise leveraging its patent portfolio, in order to stay above ground longer-term? The answer is, not a whole lot.

In fact, 3-4 billion euros [$3.9B-$5.2B] is probably all that's needed and the company can continue to burn cash for a considerable period of time, until restructuring efforts pay off and the company is again in the black.

So how much are Alcatel-Lucent's patents worth? Well, this is not an easy question to answer, but MKM Partners attempts to clarify it for us:

Alcatel's patent portfolio, which includes technology to help mobile-phone service providers manage large numbers of small base stations, could also be worth $9 billion alone, double what six companies led by Cupertino, California-based Apple (NASDAQ:AAPL) paid for Nortel's patents, according to MKM Partners.

The bidding contest ended after 19 rounds with a price that was five times more than the $900 million that Google Inc. (NASDAQ:GOOG) of Mountain View, California, agreed before the process began.

Alcatel, which inherited Bell Labs from its Lucent deal, has 14,000 approved patents as well as applications submitted for an additional 4,800, according to data compiled by MDB Capital Group, a Santa Monica, California-based investment bank specializing in intellectual property.

Of the 139 publicly traded companies with more than 2,000 patents, Alcatel is one of only three or four specializing in telecommunications that may be willing to sell their licenses, said Chris Marlett, MDB Capital's chief executive officer.

Based on the above information alone and not looking at anything else, Alcatel-Lucent is a buy. Evidence suggests that the company's patent portfolio is worth more than all the company's financial debt coming due over the next several years and all the company's financial debt, put together.

Because Alcatel-Lucent is currently losing money, we can not make a direct comparison with other companies on an earnings basis.

As such, I have chosen to make a comparison to Ericsson (NASDAQ:ERIC), on a market cap, revenue and Price/Sales basis, in order to try to evaluate how high the stock might go, if indeed a deal for its patent portfolio is finalized.

Market Cap











From the above table we see that Ericsson has almost double the sales and about 10 times the market cap. So on a comparable basis, Alcatel-Lucent would have to go up five times from here to have an analogous market cap to Ericsson. On a Price/Sales basis, it would have to go up about 6 times.

Of course this compassion would make sense if the company was actually making money, but it is indicative of how the market might price the stock, if the company is able to strike a deal for its patent portfolio that would permit it to continue its restructuring efforts in order to produce profits in the future.

Bottom line

If the Goldman Sachs story is confirmed and the company is able to leverage its patent portfolio, it means that Alcatel-Lucent will not face a liquidity crisis and shareholders will be spared a possible debt to equity swap in the future.

And even if the company continues to lose money, any kind of a deal for its patents (with Goldman Sachs or someone else), is enough to drive this stock 2-3 times higher than where it is today.

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.