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THE remarkable recovery of French telecoms equipment maker Alcatel is gathering pace.

Posted on: Tuesday, 9 March 2004, 06:00 CST

THE remarkable recovery of French telecoms equipment maker Alcatel is gathering pace. Its share of the soaring world market for ADSL high-speed phone lines reached 40% in the fourth quarter of last year, and accounted for 40% of group profits.The company, whose A-shares rose another 10.6% last week to E14.40, says that it is poised to win a big European contact for third-generation (3G) mobile phone infrastructure. Alcatel, which has a market capitalisation of E18.5bn ($22.6bn, Pounds 12.2bn), has been slugging it out with Ericsson, Nortel and Lucent to provide the networks for 3G.

To date, it has had to rely on Orange, the mobile arm of France Telecom, to justify the development costs. France Telecom's announcement that it plans to launch commercial 3G services later this year in France as well as Britain has given Alcatel's infrastructure business a shot in the arm.

A test system is running in Lille and a second pilot is scheduled to start within months in Toulouse. Users will be able to watch television on their phones and send video to home computers. Alcatel will provide the backbone French network for Orange, and UK infrastructure for the north-east, Scotland and Northern Ireland.

The company has also picked up a modest infrastructure contract with Austrian operator Tele.ring. But Philippe Germond, group deputy managing director, says at least one more contract on a par with the Orange deal is in the offing. Alcatel also hopes to sell 3G systems in China, where it captured a 12% share of the infrastructure for second-generation (2G) systems. And it is hoping to sell more 2G infrastructure to India and Latin America.

While some of its business areas remain tough and pricing pressure could hit lucrative ADSL sales this year, the recovery in key markets is showing through. Last year, ADSL sales rose 19% in the final quarter and mobile revenues were up 34% on Q3.

Merrill Lynch is forecasting that group sales will rise again this year, (2004) by 2% to E12.1bn, while operating profits should more than double from E331m to E748m. Next year, the bank says, operating profits could reach E979m, delivering a 7.9% margin.

To some extent, the outcome will depend upon the group's ability to resolve the long-standing problem of its mobile handsets business. Serge Tchuruk, the executive chairman, says he is seeking a partner for the business, which has sales of around E800m a year but lost E80m last year.

In the face of competition from Nokia and Sagem, a smaller French rival which took leadership in the French market at the end of last year, Alcatel has seen its European market share crumble from 6.6% to 2.6% in 18 months.

One report suggests the company is poised to put the business into a joint venture with China's Panda Electronics of Nanjing, a low-cost electronics conglomerate. Alcatel was reported also to have talked to TCL Corp, the Chinese group that did a joint venture in TV with French electronics group Thomson last autumn.

Such a deal would leave the company free for the intensifying tussle over its core business of networks and services.

ROSS TIEMAN

in Toulouse

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