March 28, 2013 8:10 pm

Alcatel Lucent nominal value cut hints at future capital raise – sector bankers

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Alcatel Lucent [ALU FP] is seeking extra ways to increase its financial flexibility by reducing the nominal value of its shares and making its first step towards a future capital raise, sector bankers told dealReporter.

The embattled networks operator will ask shareholders to support a reduction of the nominal value of its stock from EUR 2 to EUR 0.05 at its upcoming May AGM. Alcatel has been restricted from issuing any new shares or convertible instruments since November 2011 as its shares have been trading below the nominal value. The group’s recent three-month average trading price has been EUR 1.18.

While a cut in the nominal value could be a simple precautionary measure by management, it is likely being done with specific intent, sector bankers and an ECM banker said. Two ECM bankers said that a rights issue would be the most likely route the company would take to raise capital. The first ECM banker said that the depth of the cut in value would give the group room to launch an extremely discounted rights issue. A sector source said Alcatel is removing a potential obstacle should fundraising prove necessary. An Alcatel Lucent spokesperson said the nominal change resolution was all about increasing flexibility, but that a rights issue was not currently in the pipeline.

The French group raised a EUR 2bn credit facility in January, as its level of cash burning faced intense scrutiny. Alcatel reported a negative free cash flow of EUR 679m for the end of 2012. The networks firm was under intense pressure to raise the money “while the heat was on, but the house was not yet on fire”, a source close to the company said. Alcatel’s cash burning levels squeezed the debt-to-cash ratios during negotiations with lending banks, so time was of the essence to secure refinancing while terms worked in Alcatel’s favour.

The company intended to use the proceeds of the credit facility toward maturities totaling EUR 2.656bn, according to a presentation to lenders as seen by this news service. Should Alcatel wish to pay down these liabilities in full, the company would have to supplement its EUR 2bn with cash.

Sector bankers agreed the EUR 2bn refinancing had given the group a little breathing room. One sector banker said that, while the company was no longer “desperate” to raise cash, it would likely want to do it to help with investments, other liabilities and the costs that would come with restructuring. A potential rights issue, convertible issuance or placing would all be options newly available as a result of reducing the nominal value.

While Alcatel’s refinancing removes immediate liquidity pressure, concerns still remain that its long-term stability would need a capital boost. The group previously said that it would use the secured proceeds from near-term maturities totalling EUR 1.96bn and EUR 462m 6.375% notes due in 2014, EUR 1bn 5% convertible bonds due in 2015 an EUR 500m 8.50% senior unsecured notes maturing in 2016. In addition, the company indicated its intention to refinance convertible debentures due in 2023 and 2025 totalling EUR 694m. Rating agency Standard & Poor’s said that it would look negatively on a move by the company to reduce large debt maturities beyond 2015.

The source close confirmed that Alcatel would focus on using the funds towards its earliest debt repayments. However, the source acknowledged that any further restructuring decisions by new the CEO – ex-Vodafone executive Michel Combes – would provoke one-off charges which would have to be financed. The source said it would be out of the question to ask for another loan to tack on to its recently replaced one.

The risk of a rights issue is that Alcatel might not be able to raise as much as it would need to address its problems, the second ECM banker said. The sector source said that the lack of investor confidence in the company could mean a capital raise might not be the best option at the moment.

The first ECM banker was more upbeat on Alcatel’s ability to tap investors, suggesting a EUR 1bn capital raise would be possible, but only with clear use of proceeds split between capex and debt reduction. He added that more ambitious goals than the existing transformation plan would also be needed.

But this would likely take time. Whatever Alcatel decides, the new CEO only begins work on 1 April, making an imminent rights issue unlikely, the second ECM source believed. Following the cut in the nominal value, a rights issue may emerge in the coming 12 months, the first ECM source said.

Resolutions being put to Alcatel’s AGM in May will restrict the board’s ability to launch at will any issues, with and without pre-emptive rights, of shares and convertible bonds to a nominal value of EUR 40.5m. This translates into 810m shares at the new nominal of EUR 0.05, or 34.78% of the current outstanding shares. At Thursday’s closing price of EUR 1.051 per share, this would raise approximately EUR 851m.

An EGM would be necessary to approve a significant capital raise in a single operation. Alcatel’s board would likely take the EGM route rather than exhausting its capital authorisations, as the group would in any case require the backing of its shareholders, the first ECM source believed.

Cash is king

Alcatel is now “hell-bent” on becoming cash-positive, the source close to the situation said. Former CEO Ben Verwaayen stepped down in February after admitting the company’s restructuring needed “execution, execution, execution” and this was not his natural strength. The source close to the situation and a second sector banker agreed that Combes, the group’s new CEO, is more of a ‘finance man’ who will be more focused on steering the company back to growth.

The first ECM source said that Combes would likely need management incentives aligned with new goals in order to build an equity story for a capital raise. The new CEO was awarded 1,300,000 “performance units” as part of his remuneration package rather than share options. A person close to the company said that, due to the group’s low stock price, its stock-based awards could not be considered incentives, but the performance units would be vested depending on key areas of business performance.

The group has explicitly said it is targeting asset sales to raise between EUR 1bn and EUR 1.5bn. But given the longer term time frame of 12-18 months, Alcatel is not expecting an imminent cash boost from disposals. The EUR 2bn refinancing has taken the pressure off potential fire sales, the source close said. Paul Tufano, Alcatel’s finance head, said of asset sales on a conference call: “The important thing to note is we’re not going to do it in a hasty fashion.”

Alcatel Lucent is unlikely to sell either its optics or IP business, the source close said. Alcatel realises that both divisions are needed to generate sales for the other and the group has taken steps to integrate the two divisions.

Conversely, the company has separated out its Enterprise division which makes it the most likely sale priority, the source close added. Alcatel’s enterprise division accounts for EUR 764m of group revenues, 5.3% of total group revenues of EUR 14.4bn, according to its annual report. Alcatel-Lucent recently poached an IP expert from Nokia, Craig Thompson, who will help to drive growth within the business, the source close said. The group’s patent portfolio has generated over EUR 2bn in royalties over the last 10 years producing on average over EUR 200m a year.


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