Analysts downplay Nortel, Lucent fears
Copyright 2002 The Deal L.L.C.
The Daily Deal…08/01/2002
As the telecommunications slump deepens, concerns about the long-term viability of Lucent Technologies Inc. and Nortel Networks have flared with every new dismal forecast for the industry.
In fact, though, most observers say both telecom equipment makers have enough cash to weather the next 18 months. Also, if telecom spending continues to decline, the companies could stave off bankruptcy through creative dealmaking.
Steven Levy, a managing director with Lehman Brothers Inc., said Lucent and Nortel would not have held debt offerings this spring, which diluted their earnings per share, if they intended to file for bankruptcy. The transactions were intended to help the companies raise cash and stay solvent in case the telecom equipment market continues to deteriorate through 2003.
The companies' respective debt loads, while significant, are not major elements of their overall cost structures, Levy said. For example, Lucent's interest expense for the quarter ended June 30 was $107 million. Nortel had no interest payment for the same quarter and made a relatively modest quarterly long-term debt payment of $55 million.
With Nortel's stock falling to roughly $1 and Lucent trading at $1.71 per share as of late Wednesday, July 31, some analysts have warned that delisting from the New York Stock Exchange could hurt the companies' ability to tap the capital markets for financing.
But delisting is not a foregone conclusion, other industry watchers argue.
"The markets look at a number of criteria besides share price when considering delisting, like institutional ownership, market cap, etc.," said Hasan Imam, a partner with Thomas Weisel Partners LLC of San Francisco. "I cover companies that have been trading below $1 for many more days than 30 and have not been delisted."
If Nortel were stricken from the New York Stock Exchange, where it trades, it could continue to trade on the Toronto Stock Exchange, another analyst said.
Still, conditions for the large networkers are degrading much faster than anyone had anticipated. Last week Murray Hill, N.J.-based Lucent announced a third-quarter loss of $7.9 billion on revenues of $2.95 billion, a 16 percent sequential revenue decline. In mid-July, Nortel reported a net loss of $697 million on revenues of $2.77 billion for the quarter ended June 30, a 5 percent sequential decline and 40 percent annual decline.
Susan Kalla, a telecommunications analyst with Friedman, Billings, Ramsey & Co., said Nortel and Lucent ultimately may have to consider bankruptcy as a way to restructure their balance sheets. The option, she said, is for them to "fall under their own weight at their current capital structures."
Amid an ongoing effort to sell noncore assets, Lucent continues to paint an optimistic future, and it sternly denounces suggestions it faces bankruptcy.
"Our cash position remains very strong," a company spokesman said. "We continue to see improvements in gross margin, operating expenses, vendor financing and accounts receivable. The suggestion that Lucent is considering bankruptcy has no basis in fact and is completely irresponsible."
Lucent is in compliance with its credit covenants as of the quarter ended June 30, the spokesman said. It reported cash and short-term investments of $5.4 billion, debt maturing in one year of $173 million and long-term debt of $3.2 billion.
Nortel declined to comment. For its most recent quarter the Brampton, Ontario-based company reported cash and equivalents of $4.9 billion and long-term debt of $4.1 billion.
Gabriel Lowy, a vice president with French investment bank Credit Lyonnais, said Lucent and Nortel could merge or make business alliances to avoid the "black eye to themselves, investors and bondholders that a bankruptcy would cause."
Nortel could avert bankruptcy by selling or spinning off most of its assets, perhaps retaining its wireless operations, another analyst said.
Michael Duran, a partner with New York venture capital firm Apax Partners Inc., large networkers including Nortel, Lucent, Siemens AG of Germany and Alcatel SA of France are now "aggressively" auctioning assets.