Alcatel to discuss Lucent deal amid merger worries

PARIS - Giant telecoms equipment maker Alcatel said its board will meet later this week to discuss a possible merger with smaller US rival Lucent Technologies, as concerns grow over the plan.

Alcatel shares closed down 1.9 per cent at 12.80 euros ($25.79) on Monday, having gained 1.56 per cent on Friday, when news of the merger plan emerged.

"Alcatel has been dragged down today because people are a little bit sceptical about the merger, about the value created for shareholders, and also about the financial solidity of the new combined company," said Edmund Shing, European strategist with Kepler Equities in Paris.

Dresdner Kleinwort Wasserstein said in an equity sales note: "It is hard to fathom, in our view, any combination of telecom equipment makers that would have lower chance of succeeding than a combination of Alcatel and Lucent."

An Alcatel spokeswoman said the board of Alcatel would meet on Thursday to discuss the possible merger with its smaller competitor, which would create the world's biggest network equipment maker.

"There is a board meeting to provide information about the issue on Thursday, but there won't necessarily be any conclusions," she said.

The companies said last Thursday they had started discussing a "merger of equals" that was intended to be priced at market.

The new group would be incorporated and headquartered in France, sources close to the matter said, and Alcatel intends to keep its stake of almost 10 per cent in European defence electronics group Thales, despite speculation that it could sell the stake to facilitate a planned merger.

"Everybody thought it was a done deal on Friday, but now they are not so sure," said Kepler Equities' Shing.

"You still have a lot of disagreement over who will be the top dog in terms of management. Will it be the Lucent CEO Patricia Russo? If so, what does that mean for their existing French strategic assets, such as their existing stake in Thales?" he said.

"Thales is a defence asset and the French government would not necessarily be keen to see a Franco-American company take a bigger stake in what is a very sensitive company from the French point of view."

Oddo Securities defence analyst Yan Derocles said it would be difficult for Alcatel to keep its stake in Thales if the merger went ahead.

"In my view if the merger between Alcatel and Lucent happens, Alcatel will have to dispose its stake in Thales," Derocles said. Thales is the prime contractor in France for the Ministry of Defence, while Lucent undertakes defence contracts in the US, he said.

Lucent's government work includes a contract with the US Defence Department to supply telecoms equipment for the Iraqi reconstruction project, and it also provides classified technology to the Defence Department.

"There are a lot of sensitive projects in both France and the US, so it would be really difficult for Alcatel to manage its stake in Thales and its relationship with Lucent," said Derocles.

Dresdner Kleinwort Wasserstein also raised concerns about the merger on defence grounds.

"Lucrative defence-related work -- estimated to represent around 5 per cent of both Alcatel's and Lucent's turnover (and much higher share of profits) -- appears destined to gradually dwindle on national security grounds," said Nick Seaward from the firm's equities liaison team.

A merger between Alcatel and Lucent would create the world's biggest telecoms equipment supplier with combined sales of 21 billion euros ($42.26 billion). Alcatel is interested in Lucent's wireless assets, while Lucent would win the help of a stronger company to stem several years of ailing sales, analysts said.

"We believe complications could result in an immediate fall in sales," Seaward said.

"Alcatel is partnering with Fujitsu (Ltd) in WCDMA (high-speed wireless technology) and Lucent with Juniper (Networks Inc) and Cisco (Systems Inc) in core routing -- alliances that are unlikely to survive the involvement of a third source of products.

"Within the US telecoms market, Alcatel-Lucent could lose share as players like Verizon (Communications Inc) and AT&T (Inc) may feel uncomfortable dependent on one supplier," he said.

Lehman Brothers analyst Andrew Gardiner said that savings from an Alcatel-Lucent combination would likely prove challenging and could take until 2008 to materialize.

"Our conclusion, on limited information, is that while the company should have greater overall scale, the scope for cost savings might disappoint relative to expectations," he said in a research note.

"Limited customer and product overlap allows for an easy integration, but limits the scope to cut costs."

However, Oddo Securities telecoms analyst Vincent Maulay said he believes the merger would make sense.

"They would have cost synergies which are very clear," he said.

"But there are still uncertainties, especially as a similar move was abandoned in 2001... It's quite confusing at this stage."

The two companies came close to merging in 2001, but the deal fell through because Lucent balked at the notion that Alcatel would lead the joint company.

Maulay added that should the merger not happen, Alcatel would be in a much stronger position than Lucent.

"The story of an Alcatel stand-alone is more beautiful than a Lucent stand-alone," he said.

- REUTERS