Is The Telefonica Deal Alcatel's Silver Bullet?


Alcatel Lucent is in dire straits. The maker of telecom-grade networking equipment is cutting costs, looking for short-term financing, and generally struggling to make ends meet.

So it's great news when a global telecom picks Alcatel equipment for a next-generation network upgrade. That's what happened last week, when Spain-based telephony giant Telefonica settled on Alcatel's 7950 XRS series of megarouters to run its backbones in Argentina and the Czech Republic. Other markets might follow later -- Telefonica is a sprawling brand with nearly worldwide operations.

Fellow Fool Rich Smith waxed poetic about the equipment deal's importance to investors: "Forinvestors in the Franco-American telecom equipment giant, hope of a turnaround springs eternal. Today, it might even be justified."

It's certainly not bad news. Every sale is money in the bank, and Alcatel could use some street cred. If Telefonica expresses satisfaction with its new Alcatel routers, others might follow suit. The company's largest customers are American powerhouses AT&T and Verizon , but don't forget about potential sales to other non-U.S. titans. Vodafone , Deutsche Telekom, and France Telecom also operate planet-spanning networks, and they'd be silly not to take Telefonica's experiments into account when cooking up their own next-generation infrastructure orders. Down that path lies Alcatel's potential to make a full recovery.

However, I would also note that Alcatel hardly grabbed the entire Telefonica account. Cisco Systems remains a major supplier for Telefonica's back-end needs, and the telecom is buying Cisco's top-of-the-line CRS-3 routers alongside those hefty Alcatel systems.

I like the way Alcatel is handling the current cash crunch crisis, and the Telefonica deal is another positive sign for hopeful long-term investors. That said, it's not a game-changing signal to back up the truck. Alcatel Lucent is a compelling turnaround play, but a risky one that needs to be handled with care.

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Fool contributor Anders Bylundowns shares of France Telecom but holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Cisco Systems and France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom and Vodafone. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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