Has Alcatel-Lucent Made Good on This Upgrade?

Analysts at Citigroup upgraded shares of Alcatel-Lucent (NYSE:ALU) to Neutral and raised their price target to $1.73 last Wednesday, based on improved carrier spending throughout the industry and the company’s reduced risk of bankruptcy. Since the rating change, the telecom equipment manufacturer has already made good on the firm’s assessment to some degree.

Alcatel-Lucent announced on Wednesday that it had secured a deal with America Movil (NYSE:AMX), Latin America’s largest wireless services provider, to construct a 17,500-kilometer-long (10,875-mile-long) submarine cable system. This design will be the first system of its kind to send 100-gigabit-per-second transmissions, according to Alcatel’s press release.

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Today, “100G technology is playing a fundamental role in scalability as operators are seeking to manage their bandwidth expansion to meet increasing demands for content-rich services and to address new applications such as data center interconnection needs,” said Philippe Dumont, President of Alcatel-Lucent Submarine Networks, in the release.

The submarine cable line will connect seven countries with eleven landing points in the United States, Colombia, Brazil, the Dominican Republic, Mexico, Puerto Rico, and Guatemala…
However, despite bringing in much-needed business, Alcatel-Lucent’s submarine unit may be put up for sale. With an average annual cash burn of more than 700 million euros ($950 million) and $3 billion worth of bonds and loans due to be repaid in the next two years, the unprofitable telecom equipment manufacturer needs one thing above all others: cash. The company is considering a sale of its submarine unit as a means to shore up its finances; the business is a very profitable segment for Alcatel, with double-digit margins and a 40 percent market share.

The company’s finances received an additional boost on Wednesday as well. Alcatel-Lucent announced that its credit facility, underwritten by Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS), was raised from 1.6 billion euros to 2 billion ($2.71 billion) following strong investor demand.

“Alcatel-Lucent confirms that the proceeds will be used for the refinancing of certain existing indebtedness and for working capital and general corporate purposes,” the company said in a statement seen by Reuters.

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