Alcatel hands satellites to Thales ahead of Lucent deal

Alcatel has agreed to sell its satellite activities to French defense electronics group Thales, reducing national security concerns about its merger with Lucent

Alcatel has swept away another security obstacle to its merger with Lucent Technologies, agreeing to hand over its satellite and security activities to French defense and aerospace electronics group Thales.

The French government considers Alcatel's relationship with Thales of national strategic interest. Alcatel's agreement to sell its satellite business to Thales mirrors Lucent's undertaking to set up a separate subsidiary run by U.S. citizens to handle sensitive research and development work for the U.S. government.

Alcatel, of Paris, and Lucent, of Murray Hill, New Jersey, announced plans Sunday to merge in a deal that will leave Alcatel shareholders holding around 60 percent of the combined company, but put Lucent's Patricia Russo in the role of chief executive officer (CEO). Alcatel was already discussing the satellite transaction with Thales as the Lucent deal concluded.

Under the terms of the agreement, announced Tuesday, Thales will take control of Alcatel's stakes in two satellite joint ventures, which together generate around Euro 1.1 billion in annual revenue. Alcatel holds 67 percent of Alcatel Alenia Space and 33 percent of Telespazio, with Italy's Finmeccanica holding the remainder of each. Alcatel will also hand over its transport systems division, which develops signalling systems for railways, and the parts of its systems integration division not concerned with telecommunications. Those activities have annual revenue of around Euro 900 million.

In return for the satellite and security activities, the Thales board agreed to pay Alcatel Euro 673 million (US$820 million) and 26.67 million Thales shares. The transaction will boost Alcatel's stake in Thales from 9.5 percent to 21.6 percent, with the French government holding 27.1 percent, and 42.4 percent of the shares traded on the stock market. The deal is expected to close in the second half of the year, subject to approval from various French regulators, Finmeccanica, Alcatel-Lucent, Thales shareholders and the Thales workers' council.

Thales, of Neuilly-sur-Seine, France, employs around 60,000. Alcatel's satellite and security businesses will bring it around 11,000 more employees, mainly in Canada, France, Germany and Italy. Thales expects the deal to bring annual cost savings of around Euro 50 million from 2008, Chairman and CEO Denis Ranque said in a conference call Tuesday.

Alcatel and Thales will continue their existing technical and commercial cooperation agreements, the companies said.

Another group, European Aeronautic Defence and Space Company EADS NV, had been hoping to form closer links with Thales, but Ranque said any such deal would have to wait.

"Let's ask the customers. It would be silly to have a European leader when customers want competition. Let's take time, analyze what is happening. First we need to consult with our customers," he said.

Ranque's desire to ask Thales customers for their views on such a deal may be more related to their role as competition regulators: the largest customers are the French and British governments, ahead of EADS, which is the group's largest commercial customer as well as a potential suitor, Ranque said. The European Commission will also be a significant customer in future, with its oversight of the Galileo satellite navigation project.

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