ALU in Need of a Boost: Patents may act as a Rare Solution

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Alcatel-Lucent SA (ALU) owns patents that may amount to value a higher than that of its own.

Despite being the largest supplier of telecommunications equipment in France, but in the recent years, it has been gradually declining in value and the company is giving potential buyers a chance to obtain its earnings for free with patents.

The Slump

Sales falls

Last week its sales had fallen beyond the estimates of analysts. It reported second-quarter sales of 3.9 billion euros leading to a 30% decline in market value since leading it to sell for 10.5 times estimated profit. This is the lowest valuation in more than a decade, according to data compiled by Bloomberg. Its shares, which can be traced back to the late 19th century, have fallen every day since its earnings announcement on July 28.

The stock had climbed 55% and The MSCI World Technology Hardware & Equipment Index, which includes Alcatels biggest competitors, fell 1.3 % over the same span.

Lucent Purchase

After the purchase of Lucent Technologies Inc. in 2006, a deal of $ 15.3 billion, the Paris-based company has been losing money every year. The merger took place hoping both companies would compensate for each others weaknesses and that Alcatel’s strengths in building equipment for high-speed DSL lines were a good complement to Lucent’s expertise in wireless equipment.

ALU is now valued at 5.5 billion euros, versus 111 billion euros in September 2000. Ever since the takeover the company has plummeted 76 %, reporting almost 10 billion euros in net losses, data compiled by Bloomberg show.

Stiff Competition

The Chinese telecoms equipment manufacturers, Huawei and ZTE which have carved out a 30% + share of the EMEA market. The duo have dominated the market for a significant period of time.

Additionally, ALU suffers from low margins and a wireless business that is gradually declining. Big steps need to be taken to keep the company going and for its investors to reap profits.

End of losses

On the 5th of this month, a seven-day losing streak came to an end as ALU shares climbed 3.5 percent to 2.46 euros, snapping

The analysts are optimistic, anticipating a return to profit this year. Shares of Alcatel are projected to rise to 3.79 euros in the next 12 months. Alcatel currently trades at 10.5 times its earnings estimate of 0.23 euros a share in 2011, the data show. Thats the lowest since at least 2000, data compiled by Bloomberg show.

The sum-of-the-parts valuation argues that this company is severely undervalued, said Mike Genovese, a Greenwich, Connecticut-based analyst at MKM Partners. But he believes that by applying the multiples of its closest rivals to each of Alcatels units and including the patents, the companys value can be increased. On a per-share basis, he estimates that all of it pieces would add up to 6.51 euros a share, an almost threefold increase from its current price.

Exploring Options

Turning to the public

ALU said it is exploring strategic options for its enterprise business, which makes office telephones and related equipment last month. In April sale or an initial public offering of the business was under consideration and it estimated that it could raise up to 1.5 billion euros.

Stockholm-based Ericsson AB was is vying with Alcatel to roll out fourth-generation mobile-phone networks to serve devices such as iPhones, examined by the latter, earlier this year as a potential target following the divestment of the enterprise business, according to a person familiar with the plan. Rumors suggest that the former company decided against pursuing ALU after a review on the state of the company.

Hidden Assets

It has come to light that the companys patents may be worth twice as much as the $4.5 billion that Nortel Networks licenses sold for in a bankruptcy auction in June, according to MKM Partners LP and analysts expect Alcatels routers and optical fiber products to drive a 59 percent share gain.

Alkesh Shah, an analyst at Evercore Partners Inc. said that, The patent portfolio is one of the hidden assets of value that I dont think investors have paid much attention to. When taking into account for its 18,800 U.S. patents indicates Alcatel may be worth $20 billion.

What does this mean for ALU? Shah suggests that instead of focusing on Alcatels money- losing operations, investors should be looking at the next piece, which is a very large patent portfolio that has actual value thats being undervalued by the public market.

The companys patent portfolio, which includes technology to help mobile-phone service providers manage large numbers of small base stations, could also be worth $9 billion. This has boosted the value of those patents as companies such as Apple try to buy more exclusive rights to inventions used in almost every device from the iPhone to Googles Android-based handsets.

19 rounds of bidding landed the patents with a price that was five times more than the $900 million that Google Inc. of Mountain View, California,agreed before the process began.

Whats more is that data compiled by MDB Capital Group, a Santa Monica, California-based investment bank reveals that the company inherited Bell Labsfrom its Lucent deal, has 14,000 approved patents as well as applications submitted for an additional 4,800, according to specializing in intellectual property. Bell Labs has been involved with development of the transistor, lasers, solar cells and satellite and mobile-phone technology.

Simon Leopold, an analyst at Morgan Keegan & Co. in New York, said in a telephone interview that A wealth of inventions all came out of Bell Labs.

The MBDs chief executive officer added that Alcatel is one of only three or four specializing in telecommunications that may be willing to sell their licenses.

Although the break up and sale of Alcatels pieces may be the fastest way recoup shareholder losses, France has strong policies to protect local industries and jobs and this makes realizing that value less likely, according to Michael Yoshikami, chief executive officer and founder of YCMNet Advisors.

In a nutshell

Companies are just now waking up to the value of intellectual property, said MDB Capitals Marlett. Looking at the companys large patent portfolio, monetizing it seems like a viable action that can be taken.

During the financial crisis in 2008 President Nicolas Sarkozycreated Frances Strategic Investment Fund, investing in companies that were considered to be strategic by the government. Therefore whether or not the French government and EC decide to protect the company is greatly important.

By holding its patents up for sale, the buyers can use them to repel competitors to the telecommunications industry such as Apple and Google according to analysts. Some feel that selling its patents would effectively signify the end of Alcatel-Lucent as a telecommunication equipment supplier.

 

Sources: Bloomberg, StreetInsider.com, ElectronicsWeekly.com

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