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Nokia's 15.6 billion euro ($17 billion) acquisition of
Alcatel-Lucent announced in mid-April aims to position the
company to better compete with market leader Ericsson <ERICb.ST>
and low-cost Chinese powerhouse Huawei [HWT.UL], by forging a
strong number two in mobile with a more complete product line.
But with competition in the sector remaining intense and demand
from telecom operators soft, some investors still have concerns
about the marriage.
Analysts warn competitors may exploit any uncertainty among
customers created by the merger. The deal is supposed to be
completed by mid-2016, although Alcatel-Lucent hinted that
closing could come earlier since some key regulatory approvals
had already been secured.
Shares of Nokia surged 7.8 percent while Alcatel gained 5.7
percent, having slumped 20 percent and 27 percent respectively
in the past three months against a 20 percent fall for Ericsson.
Analyst Alexander Peterc at Exane BNP Paribas, with a "buy"
rating on both, said the results boded well for the takeover.
"Nokia's quarter was much better than expected on the operating
margin and Alcatel's performance was good as well," Peterc said.
"There are no signs that the financial results of the companies
are diverging in Alcatel-Lucent's favor, so there is little
chance that the terms of the deal are renegotiated."
A handful of Alcatel-Lucent investors including third-largest
holder Odey Asset Management had called for better terms after
its first-quarter results were markedly better than Nokia.
But few expect this to succeed since the deal is structured as a
tender offer, requiring only a majority of Alcatel shareholders
to be willing to sell.
SOFTWARE SALES
Alcatel-Lucent holders will get 0.55 shares in Nokia for every
Alcatel-Lucent, ending up with 33.5 percent of the enlarged
group.
In the second quarter, Nokia, the world's No. 3 telecom network
equipment maker, posted a surprise rise in profits and margins,
helped by lucrative software sales and a refusal to chase
lower-margin contracts.
Alcatel-Lucent's second-quarter sales were slightly lower than
expectations but operating profit and margins topped consensus,
as a focus on cost cuts offset weaker U.S. demand.
Also encouraging was double-digit growth in products that help
telecom operators direct internet traffic, as well as the fact
that Alcatel-Lucent generated more cash than it consumed for the
first time since 2006.
Gartner analyst Sylvain Fabre said the results boded well for
the marriage. "The consolidation of their two product lines will
be long and painful, but at least they will be beginning the
effort with both companies in a relatively healthy place."
Much will hinge on how the telecom gear market performs for the
rest of the year. Nokia chief Rajeev Suri said demand in
emerging markets was strong, especially India, the Middle East
and Africa, while Japan, Europe and North America were weaker.
The lucrative U.S. market, a major driver of Alcatel-Lucent
sales and profits, had got off to a slow start this year as
operators like Verizon and AT&T curtail spending. But
Alcatel-Lucent saw an uplift in sales there in the second half.
(Additional reporting by Eric Auchard; Editing by David Holmes)
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