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Alcatel-Lucent Bags a Verizon Deal

Posted on: Tuesday, 27 March 2007, 12:00 CDT

Alcatel-Lucent executives no doubt will be heading to the Mar. 27 Cellular Telecommunications Industry Assn. show in Orlando with a spring in their step. On Mar. 26, the telecom equipment giant signed a $6 billion, three-year deal with mobile voice and data provider Verizon Wireless.

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In the biggest such contract ever announced in North America--and by far the largest in Alcatel s history--the Paris company will supply equipment, software, and services to support network expansion at Verizon Wireless, a joint venture between Verizon Communications [ ticker VZ /ticker ] and Vodafone [ ticker VOD /ticker ]. Alcatel-Lucent [ ticker ALU /ticker ] also will continue to be the primary network infrastructure supplier.

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The win is some much-needed good news for the company, formed last November from the $17 billion merger between France s Alcatel and New Jersey-based Lucent Technologies, the former equipment arm of AT&T [ ticker T /ticker ]. The company s profit warning in January, which it blamed on a shift in spending at some large North American customers and heightened competition abroad, prompted many to question the merits of the combination [see BusinessWeek.com, 1/23/07, "The Reason for Alcatel s Shocking Miss"].

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leadin "A Good Win" /leadin The deal added fizz to Alcatel-Lucent s stock, as shares rose 0.20, or 2.3%, to 8.90 [$11.86] in Paris and were up 3.3%, to $11.91, at midday in New York. But to say that the contract is a sign that it s time to toast the merger s success would be premature. For a start, it s the extension of a previous, $5 billion deal Lucent won in 2004. Verizon Wireless and Lucent also are likely to have begun talks on the terms of the renewal before the Alcatel merger was finalized.

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"It s a good win but one that they should have made," said Richard Windsor, an analyst at Nomura Securities in London who has a neutral recommendation on the stock. "If they hadn t, it would have meant even bleaker prospects for the merger."

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Unlike carriers in other parts of the world, when U.S. providers are happy with their suppliers they are unlikely to shop around in search of a better offer, one analyst notes. Indeed, a spokesman for Verizon Wireless said it wasn t even a competitive bidding process, although the company also works with Nortel [ ticker NT /ticker ] and Motorola [ ticker MOT /ticker ].

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leadin Capitalizing on 3G /leadin "At least in the U.S., [Alcatel-Lucent] isn t being challenged, because everywhere else it s a fierce fight," said Remi Thomas, an analyst at Paris brokerage Cheuvreux.

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The Verizon Wireless pact is part of Alcatel-Lucent s effort to capitalize on the increasing adoption of high-speed wireless networks, known in the industry as "third-generation" networks, that are being rolled out in the U.S. Alcatel-Lucent s products and services will let Verizon Wireless widen coverage and boost the capacity of its CDMA-based broadband mobile network. It will also enable the wireless company to introduce new services such as Voice over Internet Protocol and mobile video.

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Ken Wirth, president of Alcatel-Lucent s Verizon business unit, says the breadth and depth of services that Alcatel-Lucent has been able to offer Verizon Wireless in the contract show how the merger "closes the holes [in their portfolios] for both companies" and will help the combo win future business.

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leadin Looking for Savings /leadin Analysts are somewhat more skeptical, in this case, at least. Apart from select products such as the 7750 IP-router and microwave technology from the Alcatel side of the house, the rest of the contract consists almost entirely of Lucent technology. True, the combined company s broader portfolio means it could rely less on subcontracting over the course of the three-year Verizon Wireless deal, which could improve margins, analysts say. But none adjusted their sales or earnings forecasts as a result of the deal.

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Alcatel-Lucent management also has vowed to deliver $1.8 billion in post-merger cost savings over the next three years, including a 10% reduction in its 88,000-strong workforce. After the January warning, the company promised it would take other unspecified measures.

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No question, "the ability to win multiple technology contracts is a sign of the value proposition of the combined companies," says Mark Seery, vice-president of switching and routing at research consultancy Ovum. But in isolation, he adds, "it s not enough to vindicate the merger. That has to happen over many years." Looks like Alcatel-Lucent will have to deliver a few more mega-contracts to win over the doubters.

Source: Business Week

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