Agere Hangs In, but Pressure Builds on Lucent

The Agere affair has already been painful for Lucent (LU Quote - Cramer on LU - Stock Picks). But the damage is far from done.

Already thrice discounted to pass muster in a sour market for stock offerings, the communications parts arm's IPO had the misfortune to begin trading a day after Nortel's (NT Quote - Cramer on NT - Stock Picks) latest profit warning knocked 10%-20% off big networking stocks. The Agere offering itself hung in there Wednesday, rallying 2 cents to $6.02 on volume of 130 million shares. But Lucent watchers say the planned spinoff of this well-regarded business can only add to pressure on Lucent shares, which slid $1.43, or 12%, to $10.27 Wednesday afternoon, putting them 85% off their 52-week high.

Woe Is Lucent

Lucent's eagerness to put the IPO out even at a sharply reduced price highlights its own worries after more than a year of head-spinning calamities. Since last January, Lucent has treated investors to five successive quarterly earnings shortfalls, the firing of its CEO, the announcement of 10,000 layoffs, a few scandalous lawsuits, an 11th hour loan plea from the chairman and a pending Securities and Exchange Commission investigation.

According to one Lucent watcher, the Murray Hill, N.J.-based company is skewered on a three-pronged dilemma.

"The unfortunate issue we have is a company-specific problem mapped onto a very unfavorable industry environment and that whole mess superimposed on a dubious macroeconomic outlook," wrote Glenn Reynolds, a debt analyst with Credit Sights, a New York-based debt research firm.

At some undetermined date, Lucent will spin off its remaining 63% stake in Agere to Lucent shareholders. This will effectively subtract the value of Agere's communications chip and optical component business from Lucent. With the entire industry suffering at the hands of a glut of telecom gear, Lucent's share price hardly needs another foe.

Lehman Brothers analyst Steven Levy estimates that Agere is worth about $3 a Lucent share; he values the rest of Lucent at roughly $6 per share. Other investors give a post-Agere Lucent a value in the $7 to $8 range. That's 25%-30% below recent deeply depressed levels.

"The whole company is worth $9 unless the numbers get worse, which is highly probable," says Levy, who has a neutral rating on Lucent. Lehman hasn't underwritten for Lucent.

And even that may be optimistic: In a filing Wednesday with the Securities and Exchange Commission, Agere said contract cancellations and spending cuts among customers may cause the company to have a "significant operating loss" this year.

Whipsawing

Beyond the telecom industry's woes and the dim economic outlook, further darkening Lucent's horizon are credit commitments the company has made through vendor financing, the often undisclosed practice of lending to cover the cost of cash-strapped customers' purchases as well as, in many cases, their working cash. Some of Lucent's borrowers are in dire financial straits; in the case of upstart telco Winstar (WCII Quote - Cramer on WCII - Stock Picks), Lucent's credit line happens to be one of the last salvations when traditional financing is gone.

For example, in October 1998, Lucent committed $2 billion in financing to Winstar, half of which Winstar can draw down at any time. So far the company has taken $600 million of the loan. This could easily unnerve Lucent holders, considering that Winstar, as noted in a recent telecom debt story, is being battered by investors who fear the company is having trouble financing its operations.

Lucent has made $5.7 billion worth of loan commitments to customers, and at the end of last year $1.8 billion had been tapped. This puts Lucent's fate in the hands of outfits like Winstar, Leap Wireless (LWIN Quote - Cramer on LWIN - Stock Picks) and GT Group (GTTLB Quote - Cramer on GTTLB - Stock Picks), which are both customers and borrowers.

And with customers like those you really don't need enemies like Nortel. Who else, Lucent fans can be forgiven for asking, would just happen to issue a sweeping profit warning on the eve of Agere's debut?