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Lucent a bankruptcy risk?
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June 27, 2001: 3:51 p.m. ET
Telecom gear maker faces pressure to sell fiber unit as bankruptcy risk looms
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - As the risk of bankruptcy looms, Lucent Technologies Inc. is under increased pressure to sell its fiber optic unit, but the troubled telecom equipment maker may receive help from an unlikely source—its customers, analysts said.
Lucent's top priority now is to sell its Atlanta-based Optical Fiber unit, which makes and designs optical fiber, fiber cable and specialty fiber components for the telecommunications industry, for a minimum of $3 billion, analysts said.
The Atlanta unit had initially been expected to raise as much as $8 billion to $10 billion but now the sale price has fallen to as little as $2 billion to $4 billion, analysts said. Lucent must raise $2.5 billion to complete the spinoff of Agere Systems Inc. by Sep. 30.
"They have to get a definitive agreement to sell the fiber optic unit to give credit holders comfort to spin off Agere," said analyst Ken Leon of ABM AMRO Inc.
Lucent is also looking to sell two manufacturing plants, located in Oklahoma City and in Columbus, Ohio, which are expected to raise $600 million to $900 million. The troubled telcom equipment maker also has a $750 million debt payment due July 15, one analyst said, who wished to remain anonymous.
Press reports emerged Wednesday that Lucent may cut more than 10,000 additional jobs as it tries to shave expenses. The Murray Hill, N.J.-based company has not determined the exact number of jobs that will go, but is expected to outline its intentions as part of its fiscal third-quarter results report, according to the Wall Street Journal report that quoted unnamed sources familiar with the plans.
Lucent must "hit its numbers" when it reports third quarter earnings in late July, analysts said. Lucent is also seen reporting a loss of $800 million from operations for the June quarter, an analyst said.
Earnings tracker First Call expects the company to report a 22 cent a share loss.
Junk status
Moody's Investors Service cut its debt ratings for the company to junk status Tuesday, raising its borrowing costs, and the rating agency warned it may cut them again amid weakness in the telecommunications sector and concern over Lucent's ability to raise needed cash.
Lucent's shares, like many other telecommunication equipment providers, have tumbled this year and are now down more than 90 percent from its 52-week high of $67.18. Rival Cisco Systems has dropped nearly 75 percent from its year high of $70, while Nortel Networks has plunged 90 percent.
Lucent (LU: down $0.11 to $5.89, Research, Estimates) shares shed a further two percent Wednesday, Nortel (NT: up $0.05 to $8.40, Research, Estimates) fell marginally and Cisco (CSCO: down $0.27 to $17.75, Research, Estimates) dropped nearly two percent.
Sale of the fiber optic unit is progressing and Lucent has multiple bidders for the business, company spokesman Bill Price said. The telecom equipment maker does plan to sell the two manufacturing plants by the Sep. 30 deadline, he said.
Price would not comment on reports of further layoffs Wednesday, saying the company is on track with its previously announced job reductions and moving ahead with its voluntary early retirement offer.
Lucent's debt remains unclear. The telecom equipment maker had $5.4 billion in debt as of March 31 and must raise $2.5 billion by the September deadline.
Lucent has drawn $500 million from a $6.5 billion credit facility as of the March quarter. Agere assumed $2.5 billion of the credit facility which means Lucent is left with $4 billion, Price said.
"We have ample liquidity to finance the turnaround," Price said. "We have sequential growth last quarter and have strong results from service providers."
Restructuring
Lucent's troubles have caused it to take some drastic measures. In addition to layoffs, the company's headquarters have seen a number of other cost-cutting measures recently, an employee there told CNNfn.com. They include removing the third fluorescent bulb from overhead lighting fixtures, setting the thermostat higher to reduce air conditioning demand and a reduction in security guards.
Analysts believe that Lucent's restructuring will provide savings. Plans to cut 9,100 jobs in the third quarter could save nearly $200 million and layoffs of another 10,000 people would generate another $200 million in quarterly savings, said analyst Ariane Mahler, of Dresdner Kleinwort Wasserstein, in a research note.
"Lucent has experienced some delay in executing its restructuring plan but [we] believe that the company is finally starting to feel a sense of urgency about its return to profitability," Mahler said.
While bankruptcy may be an option, it is very unlikely Lucent would file for Chap. 11 protection. "I don't think Lucent would go down that avenue," ABN AMRO's Leon said.
Instead of bankruptcy, some analysts believe that Lucent's customers--which include Verizon, AT&T, SBC, Bell South, Sprint and Quest--may come to the aid of the troubled company.
These customers will want Lucent to remain a viable supplier, Baird's Moreau said. "They want dual sources for some of their major platforms and technology," he said. "Lucent still has some new switching initiatives. Their product initiatives may be second to Nortel and Alcatel but they are still a major player."
"If banks don't lend them money, there may be other access to capital that Lucent will have beside creditors and that may be their customers," an analyst added.
The aid will likely come in the form of additional contracts but not a cash infusion in return for a stake in Lucent, Baird, said.
Some help came Wednesday when Lucent inked a three-year, $1 billion deal with Sprint (PCS: up $0.04 to $22.19, Research, Estimates) to supply equipment and services for expansion of Sprint's wireless network. Analysts expect other customers to come through with further contracts.
Banruptcy a low risk
In the unlikely event that Lucent fails to sell the fiber optic unit for at least $3 billion, it does not sell the manufacturing plants and falls below third-quarter expectations, then the probability of bankruptcy becomes more likely.
Even then a bankruptcy court will probably opt to keep Lucent running. "Lucent's debt will be forgiven, they will restructure and they will stay in operations," an analyst said. "Ultimately, they will emerge out of this."
Even in bankruptcy, Lucent's key customers, such as AT&T (T: up $0.15 to $20.86, Research, Estimates) and Verizon, may provide the necessary capital to keep the company operating, the analyst said.
"This is a whole 'What if' scenario but they would be lenders of last resort," the analyst said. "At the last rung of opportunity, some of Lucent's customers could offer money."
But the risk of Lucent filing for Chap.11 are "exaggerated," Dresdner's Mahler said. The company is unlikely to breach its bank covenants and has several options for raising cash, she said.
"We expect the restructuring plan to provide ongoing cost savings and enable Lucent to break-even in fiscal Q1 2002," Mahler said, who reiterated a Buy rating for Lucent's stock and a $12 price target.
Bankruptcy would be a great stretch for Lucent, company spokesman Price said. "This is nothing but scurrilous rumors," he said.
Another low probability option for Lucent would be to sell or merge to solve its current problems. Lucent stock is trading at around $6 but the company probably wont sell below $9 to $10, its stock price at the time of its failed $23.5 billion merger with Alcatel.
"Another suitor is always an option," Moreau, of Baird & Co., said.
But any buyer would have to pay a 20 percent premium to Lucent's stock price during the botched merger. "This has become a fading issue," said ABN AMRO's Leon. 
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