Nokia plans to buy Alcatel-Lucent in €15.6B deal

Nokia said it is to buy Alcatel-Lucent in a deal that values the France-based company at €15.6 billion ($16.6 billion) and creates a new European powerhouse in the telecoms equipment market.

In a joint announcement on Wednesday, the companies said they have signed a memorandum of understanding under which Nokia will make an offer for all of the equity securities issued by Alcatel-Lucent through a public exchange offer in France and in the United States.

Under the terms of the deal, Nokia will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their old shares. If the public exchange offer is fully taken up, Nokia would own 66.5 per cent of the combined company and Alcatel-Lucent 33.5 per cent.

The combined company will be called Nokia Corporation, with headquarters in Finland and a strong presence in France. Risto Siilasmaa is to serve as chairman, while current Nokia boss Rajeev Suri will take on the position of CEO.

The transaction is scheduled to close in the first half of 2016 subject to approval from the relevant bodies, and is expected to result in €900 million of operating cost savings by the end of 2019. It's not yet clear how many job cuts might be required to achieve cost savings targets, but the company is also planning to achieve these cuts through savings in procurement and other costs.

In addition to creating a new European equipment powerhouse, the move places both companies in a stronger position to compete with market leader Ericsson and Chinese rivals Huawei and ZTE. Based on 2014 figures, the merged company had combined revenue of around €25.9 billion and a reported operating profit of €0.3 billion. Ericsson, in contrast, generated SEK228 billion (€24.4 billion/$25.9 billion) in revenue and SEK16.8 billion in operating profit during 2014, while Huawei earned CNY288 billion (€43.7 billion/$46.4 billion) and CNY27.8 billion respectively.

"The combined company will be uniquely positioned to create the foundation of seamless connectivity for people and things wherever they are. This foundation is essential for enabling the next wave of technological change, including the Internet of Things and transition to the cloud," Nokia and Alcatel-Lucent said in a statement.

The companies stress that they have "highly complementary portfolios" and geographies, with particular strength in the United States, China, Europe and Asia-Pacific. Nokia estimates the addressable market of the combined company in 2014 was about 50 per cent larger than the current addressable networks market for Nokia alone.

Ovum analyst Mark Newman said the merger of the two businesses seems logical. "Nokia is a mobile-only equipment vendor, while Alcatel-Lucent's strengths are in the fixed network business (especially core network and IP routing). It has long-struggled in the wireless business, and its attempts to become a leading player in LTE have failed," he said.

During an analyst conference call to discuss the proposed deal, Suri said the "new" Nokia would be in second place in the carrier-grade telecoms networking and IP licensing market after Ericsson and ahead of Huawei.

He noted that the planned merger has been driven by a number of factors including the consolidation of operators across the globe and the move towards 5G. He added that the new Nokia planned to help operators realise their quad-play ambitions by providing converged mobile and fixed broadband technology, IP routing, core networking, and cloud applications.

"It's the next logical step for both companies," Suri said, noting that Nokia and Alcatel-Lucent have just completed, or are close to completing, separate restructuring processes that have placed both companies in a much stronger position.

Suri also sought to address any possible concerns that the planned merger would repeat the mistakes of the Nokia-Siemens and Alcatel-Lucent mergers in the past.

"Past integration efforts have been painful," he conceded, but he believes that new technologies such as IP and cloud will make the whole process of integration much easier than before.

Nokia CFO Timo Ihamuotila indicated that Nokia will seek divestment opportunities after taking over Alcatel-Lucent. The company has already confirmed that it is reviewing options for its Here maps unit.

"We will undertake in due course a detailed review of the combined company portfolio to identify any possible divestment opportunities and non-core assets," Ihamuotila said.

Alcatel-Lucent CEO Michel Combes said he is convinced this is a "powerful project" with long-term value potential.

"I am proud and happy to be here with Rajeev today," Combes said, adding that he believes this is an "unparalleled opportunity to create a European champion."

For more:
- see the joint statements from Nokia and Alcatel-Lucent

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