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Alcatel Lucent Wins Reliance Contract

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According to Reuters, Paris-based telecom equipment manufacturer has Alcatel Lucent (ALU) has received an 8-year contract from India-based Reliance Communications to manage its mobile and fixed networks in the southern and eastern regions of India. The contract, valued at $1 billion is primarily aimed at cutting costs and improving efficiencies for Reliance Communications.   

The contract is expected to be a win-win for both companies, because it comes as a life line for the ailing Alcatel Lucent which has been in problems for quite some time now. The company faces severe competition from low priced Chinese companies.  

On the other hand, being one of the highly leveraged telecom companies, Reliance expects to cut down its costs through this contract, thereby improving operating efficiencies. Most of the leading Telecom operators in India have outsourced their operations to companies like LM Ericcsson (ERIC), Siemens AG (Nokia-Siemens Network) (SI) and some Chinese companies to lower their costs of operations.    

Earlier to this contract, Alcatel and Reliance were in a joint venture deal, under which Alcatel managed Reliance’s mobile network across the nation. Reliance paid $750 million for the five-year contract.    

As per the terms of the new contract, about 15% of Reliance Communications employees will be employed by Alcatel. This $1 billion dollar contract comes as a relief to the services division of Alcatel which is currently in a job cut mode. Alcatel generates approximately 1/5th of its revenues from outsourcing contracts. Under this arrangement, it primarily manages networks of big telecom companies. However, according to the company, just 25% of these contracts are profitable, which is a pressure on its margins. The company is planning to exit these contracts by the end of fiscal 2013.  

Alcatel carries a Zacks Rank #5 (Strong Sell).

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