Shares of telecom equipment maker Alcatel Lucent (UNKNOWN:ALU.DL) are soaring today. The stock jumped as much as 14% on very heavy trading volume, reaching levels not seen since September (and even then just for a couple of days).
The catalyst? Alcatel's notoriously flimsy balance sheet just got a serious upgrade as banking giants Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS) agreed to throw Alcatel a $2.1 billion lifeline.
The cash infusion comes in the form of senior secured credit papers. The loans mature between three and a half to six years from now and are secured by Alcatel's intellectual property assets "among other things." We don't have any firm interest rates yet, but Alcatel plans to use some of the proceeds to refinance existing debt. The most burdensome of Alcatel's existing debt are a 500 million euro batch of 8.5% notes payable in 2016 and 747 million euro set due in 2017, with a 7.75% interest rates. So that's where the bar for sensible refinancing moves is set.
But I do expect most of the funds to be used for day-to-day operations. Goldman and Credit Suisse want Alcatel to survive and pay the debt back, meeting certain financial mileposts along the way. The recently announced cost-cutting program is expected to help Alcatel hit a gross margin around 36% and operating margin of roughly 8% by 2016. These targets are ambitious but hardly impossible:
Larger rivals Juniper Networks (NYSE:JNPR) and Cisco Systems (NASDAQ:CSCO) already sport positive operating margins -- strongly so, in Cisco's case. There's no reason why Alcatel couldn't reach these modest targets as long as the company keeps innovating. Luckily, the cost cuts supposedly left the engineering department fairly unscathed -- management is giving the company a fighting chance.
You have to assume that the huge and well-respected banks did their homework and came away convinced that Alcatel would be able to pay these loans back. This is an important stamp of approval, though Alcatel has a lot of work to do in order to follow through on its promises.