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AT&T’S READIES TO CUT SYSTEMS BUSINESS

As part of AT&T Corp.’s plan to spin off its system and technology business, newly named Lucent Technologies Inc. filed last week for an initial public stock offering, aiming to sell between 15 percent and 20 percent of the company.

Lucent also cautions that it may not be able to continue to provide financing to network operators in the same manner that AT&T has, leading one analyst to believe the statement is a warning to Sprint Telecommunications Venture. STV recently named Lucent and Northern Telecom Inc. equipment suppliers for its $3 billion personal communications services network.

At least 80 percent of Lucent’s shares will be divided among current AT&T shareholders, said AT&T spokeswoman Eileen Connelly. Plans call for the IPO to begin at the end of the first quarter or beginning of the second quarter.

Lucent is comprised of six divisions within AT&T-AT&T Network Systems, Global Business Communications Systems, Bell Laboratories, Consumer Products, Microelectronics and Multimedia Ventures and Technologies.

In the risk section of Lucent’s prospectus, the company says suppliers increasingly are required by domestic and international network operators to provide financing as a condition to bidding or winning infrastructure projects, in amounts that can be upwards of a billion dollars.

“The ability of the company [Lucent] to arrange or provide financing, without AT&T’s support, will depend on a number of factors, including the company’s capital structure and level of available credit. There can be no assurance that the company will be able to continue to arrange or provide such financing following the offerings on terms and conditions, and in amounts, that will be satisfactory to such network operators.”

“That’s a message to Sprint this may not work out,” said telecom equipment analyst Francis McInerney, president of North River Ventures Inc. Earlier this month, STV awarded equipment contracts for its nationwide PCS network to Lucent and Northern Telecom. Valued at more than $3 billion, the contracts will divide STV’s markets on a 60/40 split between Lucent and Nortel, respectively.

To gain its own financing, Lucent has entered into a revolving credit facility with Chemical Bank, allowing Lucent to borrow up to $1 billion.

Is STV seeking vendor financing? “You bet,” said Sprint spokesman Mark Bonavia, noting the company wants financing from both Lucent and Nortel. And while the three companies made the deal public earlier this month, “terms are still being negotiated,” Bonavia said.

Lucent said the bulk of contract details have been worked out with STV, but declined to comment on whether it plans to provide STV financing for its network.

Motorola Inc., a previous contender in STV equipment talks, pulled out a few weeks ago, believing it “couldn’t reach acceptable financial and commercial contract terms with STV,” said Motorola spokesman Scott Wyman.

According to McInerney, the debt-to-equity ratios among some phone and telecom companies have climbed to a level banks consider risky. Today’s high cost of building networks, which is listed as debt on a company’s balance sheet, and increasing deregulation have contributed to that risk, he explained.

Lucent’s ratio of total debt to total capital-which is debt plus equity-was 73.7 percent at year-end 1995, up from 56.1 percent at the end of 1994. AT&T attributes the increased ratio and lower equity level primarily to restructuring and other costs last year.

Lucent reported a $853 million net loss as part of its 1995 earnings, which the company attributes to a $2.8 billion restructuring charge. Lucent’s revenues for the year totaled $21.4 billion, an increase of 8 percent from $19.8 billion in 1994.

Revenues in 1995 for network systems increased 5.7 percent to $11.5 billion in 1995, compard with $10.8 billion a year earlier, of which wireless network equipment accounted for 15 percent. Domestically, sales of wireless network equipment in 1995 increased about 19 percent, while overall domestic equipment sales were flat. Internationally, overall systems revenues increased 28 percent last year, primarily because of a 14 percent increase in wireless infrastructure sales, AT&T noted.

Revenues from business communications systems increased 12.9 percent in 1995 to $5.1 billion, compared with $4.6 billion in 1994. Other Lucent unit’s year-end revenue totals include microelectronics, where sales increased 27.6 percent to $1.9 billion; consumer product sales declined 7.1 percent to $1.8 billion; and revenues from other products and systems increased 18 percent to $1.2 billion.

AT&T said Lucent’s business is highly seasonal and the bulk of revenue and income is recorded in the fourth quarter. First quarter has typically shown net loss in the equipment sector, and AT&T expects Lucent will experience greater loss in the first quarter 1996, than its $29 million 1995 first quarter loss.

With Lucent’s IPO, Richard McGinn, current chief executive officer of AT&T Network Systems, officially takes his seat as Lucent’s president. Henry Schacht will begin serving as chairman and CEO. He previously was chairman and CEO of Cummins Engine Co.

Morgan Stanley & Co. Inc., Goldman, Sachs & Co. and Merrill Lynch Inc. are underwriting the IPO, as well as other companies, AT&T said.

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