Shares of telecom equipment maker Alcatel Lucent 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 and Credit Suisse 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:

ALU Gross Profit Margin Quarterly Chart

ALU Gross Profit Margin Quarterly data by YCharts.

Larger rivals Juniper Networks and Cisco Systems 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.

The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. Thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the name of this company transforming the IT industry, click here -- it's free.

The article Alcatel Grabs a Financial Lifeline originally appeared on Fool.com.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+ . Motley Fool newsletter services have recommended buying shares of Goldman Sachs Group and Cisco Systems. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days .

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

What are Penny Stocks

The lucrative and dangerous world of penny stocks.

View Course »

Understanding Stock Market Indexes

What does it mean when people say "the market is up 2%"?

View Course »

Add a Comment

*0 / 3000 Character Maximum