Alcatel-Lucent Goes to the Bankers, Hat in Hand


No two ways about it: Alcatel-Lucent is in bad shape.

Over the past year, the Franco-American telecom equipment maker has burned through more than $500 million in negative free cash flow, even as it reported "earning" profits under GAAP -- $1.1 billion worth! The continued incessant cash bonfire at Alcatel has left the company with more debt than cash on its balance sheet, a net deficit of more than $100 million. And now, investors are beginning to wonder: Can Alcatel survive?

"Evacuate? In our moment of triumph?"
If Alcatel fails, it will be a shame -- a crying shame, really, considering that the telecom industry is finally starting to show some signs of life in the capital spending department. Nokia , for example, reported surprising strength at its telecom equipment joint venture with Siemens last quarter. AT&T has announced it's upping capital spending over the next few years, and Telefonica has even expressed an interest in some of Alcatel's hardware, specifically.

Yet if Alcatel can't stay in business long enough for this trend to firm up, it may be all for naught. When the windfall comes, it will be someone else who gets to catch it.

Send in the forlorn hope
But not if Alcatel can help it. In a last-ditch attempt to bridge the gap between today's troubles and tomorrow's promise, Alcatel announced on Friday a make-or-break plan to raise enough cash to tide itself over until it can capitalize on the improved environment for telecom equipment spending.

Specifically, the company is said to be exploring "mortgaging" its Internet-routing business and pawning its patent portfolio as security for loans. According to The Wall Street Journal, Alcatel is seeking a sponsor willing to lend it $1.3 billion and pledging the routing business as security. If that doesn't raise enough cash, the company may have to additionally pledge its portfolio of some 27,900 tech patents from the fabled Bell Labs.

Why? Alcatel has been saying for months that it has a plan to turn itself around and stanch the bleeding of cash from its balance sheet. Cuts in the works could remove $1.6 billion in costs from the company's income statement by the end of next year and return Alcatel to true cash-profitability to match the illusory "earnings" on its income statement.

Problem is, in business, you need to spend money to save money. Restructuring the company to improve efficiency, and laying off workers to reduce salary costs, itself entails costs -- lawyers, accountants, and consultants to help implement the restructuring, for example. Severance benefits to laid-off workers, to implement the redundancies.

So before Alcatel can make the cost cuts to save cash, it needs to get hold of more cash in the first place. And with Alcatel's debt rated at "junk" levels by Moody's and S&P, getting hold of cash at a reasonable interest rate poses a problem.

Still, it's possible Alcatel can pull this off. You'll recall how, a few years ago, Ford was in similar straits, junk-rated and in similar need of a corporate overhaul. With the cost of taking out loans insurmountably high, the company put its famed "Blue Oval" logo in hock, pledging the trademark as security for billions of dollars of loans needed to tide itself over until Americans started buying cars again.

It worked. In May, Ford scored its second debt upgrade and officially emerged from "junk" status. First thing Ford did was run down to its pawnbroker and get the Blue Oval out of hock.

Can Alcatel pull a similar rabbit out of the hat? You tell us.

On Motley Fool CAPS, our "you-rate-the-company" website, more than 700 individual investors have publicly placed their bets that Alcatel will pull through and outperform the market over the next several years. (For the record, nearly 200 investors are betting against them, though.) Add your vote to the mix: Rate Alcatel-Lucent's chances right here.

Alcatel isn't the only telecom equipment stock in dire straits. Once a highflying tech darling, Cisco is now on the radar of value-oriented dividend lovers now, too. Get the lowdown on the routing juggernaut in The Motley Fool's premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

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