Alcatel counts cost of Lucent merger

Alcatel-Lucent, the Franco-American telecoms equipment group, warned on Tuesday that the complexities of its recent merger had hurt profits, driving its shares sharply lower. The stock was the worst performer among France’s blue chips.

The warning is the first significant act of the group since the French and US companies completed their merger.

Pat Russo, the American chief executive, said the complexities of combining Alcatel and Lucent, while at the same time making significant acquisitions and disposals, had affected trading in the run-up to the merger.

She said: “These moves created short-term uncertainty for our customers and for our people. . .[that] significantly impacted the business.”

On a pro-forma basis, the group now expected to do little more than break even for the fourth quarter of 2006, against 2005’s €570m ($742m, £374m) operating profit, while full-year earnings would be down from €1.41bn to €1.04bn.

The shares fell 8.5 per cent to €10.02.

The botched merger process is a bitter blow to Alcatel-Lucent management, which had to fight fierce opposition from both sets of shareholders over the terms of the nil-premium deal.

Lucent was forced to settle two legal challenges out of court before winning shareholder support in September. Alcatel faced accusations of over-paying after the US company issued a profit warning soon after the deal was announced.

Remi Thomas, telecoms analyst at Cheuvreux in Paris said the fact that Tuesday’s warning included a grim update on Lucent’s CDMA business in the US – a second generation technology heavily reliant on just two big customers – had simply reinforced the view that Alcatel had paid too much.

He said: “Alcatel announced the acquisition of Lucent a year too early”.

Analysts were dismayed by the news, cutting 2007 estimates by up to 20 per cent to as low as €1.5bn. Credit Suisse now expects profits of about €1.5bn to €1.7bn in 2007, against previous forecasts of €2.1bn.

Some analysts said the group’s troubles had also raised questions about its ability to ride out the coming critical months, when customers would be watching the integration process closely.

There was a danger that some might hedge their bets by seeking other providers.

Kulbinder Garcha of Credit Suisse, said: “If you are an operator, you may now consider handing more of your business to Ericsson especially on the wireless side.

“The very low margin currently probably also means that Alcatel Lucent have less flexibility to pursue new business.That is the real fundamental risk in coming quarters.”

Nevertheless, analysts remained confident that the strategic reasons for combining the two companies remained compelling, given the demands of ever bigger clients and heightened competition.

Alcatel-Lucent said it would make an extra €200m in cost savings, bringing total benefits over three years to €1.6bn.

Ms Russo said that in spite of the difficulties in the fourth quarter, the group expected to return to growth in 2007, and promised that the trend would accelerate throughout the year.