Will This Deal Buy Time for Alcatel-Lucent

Erase DebtWith global telecom operators spending less on network equipment and competition increasing from Chinese rivals, Alcatel-Lucent (NYSE:ALU) has struggled to make its business profitable.

Can Alcatel-Lucent be a “Normal Company”?

As Reuters reported on Friday, the telecom equipment maker has an average annual cash burn of 700 million euros. The rate at which the company has spent its cash resources has prompted Chief Executive Ben Verwaayen to take severe cost cutting measures since assuming his position in 2008. But, according to the publication, he has found it difficult to fulfill the pledge he made to make Alcatel-Lucent a “normal company” with “regular profit and healthy cash flows.”

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In order to cut costs, Alcatel-Lucent secured a 1.6 billion euro, or $2.1 billion, financing deal on Friday that will be backed by company’s 29,000 patents and other assets. The secured credit facilities will be underwritten by Credit Suisse (NYSE:CS) and Goldman Sachs (NYSE:GS), denominated in both U.S dollars and euros, and have maturities of 3 1/2 to six years.

Chief Executive Officer Ben Verwaayen said in a statement seen by Bloomberg that this funding will enable the company to “aggressively” examine all options to increase profitability, improve its business strategy, and strengthen its finances.

CHEAT SHEET Analysis: Is This a Positive Catalyst for Alcatel-Lucent’s Stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. After making its financing deal public, shares of Alcatel-Lucent rose close to 10 percent. With the influx of $2.1 billion into its balance sheet, the company is better situated to make good on its new guidance for a 2015 gross margin of 35 to 37 percent and an adjusted operating margin of 6 to 9 percent. However, Bernstein Research analyst Pierre Ferragu told Reuters that his firm does not believe the target to be credible. “It implies a significant recovery in gross margins in optics and a stabilization of negative trends at most other business units,” he said.

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