Alcatel-Lucent could be banned from government procurement contracts

Monday, May 16, 2011

French telecoms equipment group Alcatel-Lucent (NYSE: ALU) could face damage to its reputation in Latin America if a current probe finds that the company breached a GSM contract with Costa Rican state telecoms incumbent ICE, the company said.

If the probe finds Alcatel CIT, a subsidiary of ALU that is now called Alcatel-Lucent France (CIT), responsible for a contract breach, Costa Rica's government could ban the company from participating in procurement contracts in the country for a certain period, ALU said in its first quarterly financial statement.

In March 2010, CIT was notified of an administrative proceeding by ICE accusing the company of committing material breaches - in particular, in connection with alleged failures related to road coverage and quality levels - under a 400,000-line GSM contract won by CIT dating back to 2001.

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"If the Costa Rican authorities conclude criminal violations have occurred, CIT may be banned from participating in government procurement contracts within Costa Rica for a certain period," the company said.

ALU said it generated 3mn euros (US$4.2mn) in revenue from Costa Rican contracts in 2010 and expects to generate some 1.5mn euros in 2011.

"Based on the amount of revenue expected from these contracts, Alcatel-Lucent does not believe a loss of business in Costa Rica would have a material adverse effect on the Alcatel-Lucent group as a whole. However, these events may have a negative impact on the reputation of Alcatel-Lucent in Latin America," the company said.

The lawsuit is the latest in a series of suits filed against CIT by ICE and Costa Rican authorities. CIT was accused of bribing officials, including former Costa Rican president Miguel Ángel Rodríguez (1998-2002), to win a US$149mn contract to install 400,000 GSM lines.

In connection with the allegations, the Costa Rican prosecutor's office indicted 11 individuals in July 2007, including the former president of Alcatel de Costa Rica, on charges of aggravated corruption, fraud and others. Three of those individuals have since pled guilty.

In March 2010, ALU paid Costa Rica's government US$10mn in "social damages."

ICE has made additional damages claims related to the GSM contract for a total of US$78.1mn, of which it has collected US$5.9mn.