Alcatel may buy Lucent for $12.6 bn

March 24 | Updated: Mar 25 2006, 05:30am hrs
Alcatel SA, the worlds biggest maker of broadband internet equipment, may buy Lucent Technologies Inc.for at least $12.6 billion to triple sales in the US.

Lucent and Alcatel are discussing a merger of equals that would be priced at market, they said in a joint statement. Paris-based Alcatel and Murray Hill, New Jersey-based Lucent failed to agree on a combination five years ago.

The union will create a company with more than $25 billion in sales, leapfrogging Ericsson AB of Sweden and challenging San Jose, California-based Cisco Systems Inc. Shares of Alcatel and Lucent, which together lost $43 billion in 2001-2003, are trading at less than they did a decade ago.

The purchase would allow Alcatel to reach a critical size and diversify in mobile equipment, said Samir Essafri, a fund manager at Richelieu Finance in Paris, which oversees more than $3.5 billion. The industry has strong pressure on prices, its an industry thats still recovering, said the fund manager.

Shares of Alcatel gained as much as 4.8% to 13.47, and traded at 13.18 at 1:58 pm in Paris. Before Friday, Alcatel was up 23% this year to the highest in almost two years. Lucent jumped 10% to $3.11 in German trading from the close of $2.82 yesterday in the US Before today, they had risen 6% this year.

Competitors shares rose as a deal may spark more takeovers. The Bloomberg Europe Telecommunication Equipment Index, which includes Alcatel, Ericsson, Nokia Oyj and GN Store Nord A/S, added 1.3%. Ericsson stock gained 2% to a four-year high.

Merger of equals

The union will create a company with more than $25 bn in sales, leapfrogging Ericsson of Sweden
The purchase would allow Alcatel to reach a critical size and diversify in mobile equipment
Shares of Alcatel & Lucent, which together lost $43 bn in 2001-03, are trading at less than they did a decade ago

Consolidation has to occur and Lucent would be the most logical candidate for Alcatel, said Jan van der Hout, a fund manager at Van Lanschot Asset Management in Den Bosch, Netherlands, which oversees $2.5 billion. I dont think deals in this industry will end, though this one is a big one.

Alcatel company is winning orders from companies including AT&T Inc. to build networks carrying internet, phone calls and TV, and Lucent would complement its product line.

With Alcatel having a stronger presence in Europe and Lucent in the US, the merger can help them expand their channels and increase efficiency, said Naoki Sato, an analyst at Morgan Stanley Japan Ltd. in Tokyo who covers Japanese equipment makers.

Alcatel has a market value of $21.9 billion, and Lucent, the largest US maker of phone equipment, is valued at $12.6 billion. Looking at the relative market capitalisations, Alcatel would most likely end up in the driving seat, said Richard Windsor, an analyst at Nomura, in a note to investors. Lucent trades at 17.2 times estimated earnings for the year through September, based on estimates compiled by Thomson Financial. The 12-member Bloomberg US Tele communications Equipment Index trades at an average of 25.3 times.