Alcatel, Lucent offer to pay lenders for more accounting freedom

Days before their merger is expected to close, Alcatel and Lucent Technologies are offering their lenders cash in exchange for the ability of the combined company to avoid having to report Lucent’s financials separately following the merger.

Under the terms of a proposed amendment to their debt contracts, “Alcatel will not be required to provide a condensed consolidating footnote of Lucent” in its annual report, as the U.S. Securities Act of 1933 requires, Alcatel said in regulatory filings today. The amendment would “allow Alcatel, in lieu of Lucent, to provide [debt-holders] with copies of Alcatel’s annual report and …other reports that are required to be filed by Alcatel.”

Alcatel, based in Paris, France, currently provides semi-annual financial information to the U.S. Securities and Exchange Commission in accordance with international financial reporting standards adopted by the European Union. “Alcatel currently intends to continue to provide such information in the future,” the company said. “However, Alcatel may change this practice in the future without notice.”

To adopt the proposed amendment, Alcatel and Lucent need the consent of holders of a majority of two series of debt: 2.75% Series A convertible senior debt due 2023 and 2.75% Series B convertible senior debt due 2025. As of November 10, 2006, the outstanding principal amount of the Series A debt was $750 million, and the outstanding principal amount of the Series B debt was $880.5 million.

The two vendors are offering a one-time cash payment for their consent. For every $1,000 in principal debt that corresponds to consent for the proposed amendment, Lucent will pay a one-time “consent fee” that is the product of $7.50 multiplied by a fraction whose numerator is the outstanding principal on the debt (as of the end of the day on Friday, December 1, 2006, when this offer to lenders expires) and whose denominator is the amount of principal for which the vendors have received consent. The fraction prevents Lucent from having to pay much more for unanimous consent than it would for a slim majority.

To get the required majority of consent, Lucent would need to pay more than $12.2 million.

Also as part of the offer, Alcatel is guaranteeing debt repayment in the event that Lucent can’t. “If Lucent cannot make any payment on either of the [debt series], Alcatel would be required to make the payment instead,” the filings said.

Lucent and Alcatel expect to complete the merger on November 30, 2006--Thursday of this week.

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