Lucent Investors Share Their Debt-Buyback Pain - TheStreet

Try as it might,



just can't drown out those grumblings about its balance-sheet cleanup.

When Lucent presented Monday morning at the Merrill Lynch Global Communications Conference 2003, Wall Street knew the company would shine the spotlight on its fiscal progress. After two years of deep job cuts and massive losses, the New Jersey maker of telecom equipment has started to show signs it's getting back on its feet. Recently the debt-encumbered company has been focusing on reducing near-term obligations, as a big convertible bond issue comes due next year.

But when financial chief Frank D'Amelio spoke Monday, the buzz was less about the company's success in paying down debt than about who's going to get stuck with the big tab. And some people attending the Lucent presentation worried that as worthwhile as a debt paydown may be, the stock could soon pay the price in a big way.

Indeed, one investor went so far as to speculate that Lucent's practice of issuing common shares by the millions in order to swap them for outstanding debt may be in danger of putting the company "in a death spiral."

D'Amelio conceded that the debt-paydown exercise amounted to "a balancing act," though he stressed that "we have been sensitive to shareholders."

"We're trying to do what we think is best," the executive said in a session after Lucent's presentation. "What's most important is the operation and performance of the company."

There have been positive signs on those fronts recently, with Lucent repeatedly saying it expects to return to breakeven by the end of this fiscal year, ending in September. But shareholders have been left to wonder what the stock will look like even if the company does get there on schedule.

There's no question that Lucent has been on a

debt-reduction tear, issuing more than 500 million new shares in the past four-and-a-half months to pay down about $1.4 billion in debt, according to a 10-Q filing this month with the

Securities and Exchange Commission


Lucent has about $2.2 billion in convertible debt remaining, $1 billion of which comes due in August 2004. While eliminating expensive debt is good -- the two bonds pay interest at 8% and 7.75% -- the flood of new shares and the attendant dilution haven't been kind to stockholders. So far, the company's total outstanding share count has risen by 15% to nearly 4 billion shares.

That kind of share issuance can't help but unnerve shareholders, who saw the stock trade below $1 for a spell only last year and remain worried about the possible return of the bad old days. Lucent dropped 2 cents Monday to $1.50.

Also potentially worrisome to investors is Lucent's failure to spell out the details of its debt-buyback plan. Pressed on the issue, D'Amelio declined to specify either how much the company expects to spend retiring debt or how long it plans to continue doing so.

But as one investor with a small stake in Lucent points out, the company can hardly be blamed for acting as it has. Sure, shareholders have been diluted by the stock issuance. Yet if the company didn't buy back debt, it might face a serious financing challenge late next year, and it would pass up the chance to use its reasonably healthy cash position to buy its debt at an attractive discount. When you're Lucent, nothing comes easy.