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 Nokia's takeover of Alcatel-Lucent will redefine a telecom equipment
sector suffering weak growth prospects and pressure from low-cost
Chinese players Huawei [HWT.UL] and ZTE.
The combined company will have about 114,000 employees and combined
sales of around 26 billion euros. In mobile equipment it will rank a
strong second, with global market share of 35 percent, behind
Sweden's Ericsson with 40 percent and ahead of Huawei's 20 percent,
according to Bernstein Research.
The Finnish company will give Alcatel-Lucent shareholders 0.55
shares in the combined company for each of their old shares,
resulting in 33.5 percent of the entity being in Alcatel
shareholders' hands if the tender offer is fully taken up.
The deal will be finalised in the first half of 2016 and is expected
to result in 900 million euros of operating cost savings by the end
of 2019, the companies said on Wednesday.
The new Nokia will have stronger exposure to the important North
American market, with key contracts with AT&T and Verizon and a
fast-growing Internet routing business.
Nokia shares rose 3 percent at the opening, while Alcatel-Lucent
fell 11 percent, reversing trends on Tuesday when the talks were
first acknowledged by the companies.
Alcatel shareholders were disappointed because they hoped for a
part-cash offer, while Nokia holders were relieved that the group
had not overpaid, a trader said.
Nokia initially approached Alcatel-Lucent about buying only the
wireless business but was rebuffed, leading to the broader deal,
Alcatel boss Michel Combes told Reuters in an interview.
The deal carries significant risks, however. The track record of
mergers in the sector - including the two that gave birth to Nokia
and Alcatel-Lucent a decade ago - has been poor. Prior deals were
plagued by the difficulty of cutting costs in an R&D intensive
business, rivals stealing contracts while the companies were
distracted by their integrations, and struggles over power within
the married firms.
Nokia CEO Rajeev Suri sought to reassure by saying he had learned
from the past.
"This is not a joint venture, so there will be no governance
issues," he said on a call with investors.
"We will take a no politics, no nonsense approach to running the
business, and have learned from past mistakes."
FRENCH JOBS PLEDGE
Nokia pledged to keep France as "a vibrant centre of the combined
company" and not to cut jobs beyond what Alcatel had already
planned, especially protecting research and development sites at
Villarceaux and Lannion.
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Alcatel-Lucent has some 6,000 employees in France. Maintaining jobs
was a key demand of the French state for its backing of the deal.
Nokia sold its once-dominant handset business last year after
struggling to compete with smartphones by Apple and Samsung. That
deal left it with the network unit, a smaller map unit and a
portfolio of technology patents.
Nokia said its growth profile would improve from the deal and
predicted sales growth rate of about 3.5 percent for 2014 to 2019.
Nevertheless some analysts remained concerned.
"Nokia's risk profile will increase considerably... The risk is that
the merger will become a long and rocky road and investors lose
their patience following through the integration programme that will
take years," said analyst Mikael Rautanen from Inderes Equity
Research.
Other analysts, however, said that Nokia and CEO Suri have a good
record on restructuring.
"There is no reason to doubt that this deal too wouldn't increase
shareholder value... We know that there are risks related to France
and the cost cuts, but I believe that Nokia has calculated a margin
of safety to the deal price," said strategist Jukka Oksaharju from
Nordnet brokerage.
Separately, Nokia confirmed it was exploring the sale of its HERE
mapping unit, which analysts value at up to 6.9 billion euros. It
also said further asset sales could be undertaken once the deal was
completed.
JPMorgan advised Nokia on the takeover, and boutique investment bank
Zaoui & Co. advised Alcatel-Lucent.
($1 = 0.9411 euros)
(Editing by James Regan and Keith Weir; Editing by Peter Graff)
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