Alcatel-Lucent (Paris, France) plans to sell its Genesys call center software business to private equity group Permira for $1.5 billion in cash but will keep a larger, less profitable chunk of its Enterprise unit that had also been on the block, it said on Wednesday.
The price, which is at the higher end of what bankers and analysts had expected, will provide Alcatel-Lucent with a welcome cash injection as Chief Executive Ben Verwaayen struggles to wrap up a three-year turnaround plan on a positive note.
"It is dispelling fears regarding liquidity, but obviously now investors will be entirely focused on the results," says CA Cheuvreux analyst Odon de Laporte.
Alcatel-Lucent shares have plunged 52% from their highs in early May compared with a 17% sectoral drop on growing worries about a potential slowdown in demand for telecom gear, especially in the all-important U.S. market.
Investors are also concerned that Alcatel-Lucent's burgeoning turnaround will be derailed, noting an unexpectedly high cash burn rate in recent quarters. The group will report third-quarter results on November 4.
The Franco-American telecom equipment maker said it expects the deal to close by the end of the year or in early 2012. The announcement of Permira's binding offer caps almost six months of talks between prospective bidders and Alcatel-Lucent.
Siemens Enterprise Communications, which is 51% owned by Los Angeles-based private equity firm Gores Group, had been one of the leading candidates, while Cisco, Hewlett-Packard and Avaya AVXX.UL also looked at the asset.
Prospective bidders, especially the private equity funds, had long been more interested in Genesys than the rest of the division because of its higher profits. Genesys had 2010 sales of about $500 million and sells software for call centers and video conferencing.
Sources had told Reuters that some bidders had concerns about the size and cost of the largely French staff of the traditional corporate voice business and would have wanted to carry out massive lay-offs to make the acquisition attractive.
Permira did look at acquiring the whole Enterprise business, but preferred to buy only Genesys, which it sees as a resilient business with attractive growth prospects, said a person familiar with the situation. By selling only Genesys, Alcatel-Lucent chose a deal that carried less risk of touching off a conflict with staff and unions in a presidential election year in France.
The Enterprise business employs around 5,000 staff worldwide, including 1,410 in the voice telephony business in France, according to the CFDT labor union, which has warned that it sees these jobs as threatened. Alcatel-Lucent has some 78,000 employees worldwide.
"Permira's intended acquisition of Genesys would enable this profitable business to flourish further," SAYS Alcatel-Lucent CEO Ben Verwaayen in a statement. "With Enterprise, we have reached the conclusion that retaining it and strengthening it further serves Alcatel-Lucent and our customers best."
Genesys and Enterprise will continue to have a "strong commercial relationship" through a joint development agreement and access to each other's product portfolios, Alcatel added.
Pierre Ferragu, analyst at Bernstein, expressed reservations about Alcatel-Lucent's decision to hold on to the traditional Enterprise telephony business, which he sees as unlikely to get easily back to profitability.
"In the long run, selling 'cash-cow' businesses and keeping structurally challenged businesses in-house is unlikely to make a good equity story," he wrote in a note, adding that the disposal would cut at least $138 million of operating profits this year.
(Reporting by James Regan, Leila Abboud, and Simon Meads; Editing by Christian Plumb and Mike Nesbit)