Nokia (NYSE:NOK) and Alcatel-Lucent (NYSE: ALU) confirmed they are in talks for Nokia to acquire Alcatel-Lucent in a merger that could give the combined company more fighting weight against Ericsson (NASDAQ: ERIC) and Huawei in the network gear market. According to research firm IDC, the combined company would become the world's largest wireless network equipment vendor. [click to tweet]
"In relation to recent media speculation Nokia and Alcatel-Lucent confirm that they are in advanced discussions with respect to a potential full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent," the companies said in a statement. "There can be no certainty at this stage that these discussions will result in any agreement or transaction."
Both vendors declined to comment beyond the statement and said that a further announcement will be made when appropriate.
While the companies previously have been rumored to be in discussions, this time may result in an official transaction.
However, as the Wall Street Journal notes, it isn't clear whether the companies have agreed on a price. Alcatel-Lucent's market capitalization is around $11.61 billion (€11 billion ), while Nokia's market capitalization is about $29.57 billion. Bloomberg noted that Nokia's shares closed on Monday in Europe with a 36 percent valuation premium to Alcatel-Lucent, based on EBITDA, which could give Nokia plenty of room to make a cash-and-stock bid for Alcatel-Lucent. After the companies confirmed the deal talks, Alcatel-Lucent's shares rose 13 percent in morning trading in Paris, while Nokia's shares fell 7.3 percent.
"Nokia thinks it's worth X, and Alcatel thinks it's worth Y," Canaccord Genuity analyst Mike Walkley told Bloomberg. "Nokia has a strong balance sheet, but they're going to stick to their guns. It's going to come down to, do they close the gap on the valuation?"
The combined company would have around $27 billion in annual revenue and more than 100,000 employees. The deal could also give Nokia a much larger share of North American wireless gear deals.
Alcatel-Lucent leans heavily on its U.S. customer base for sales. In 2014, Verizon, AT&T and Sprint (NYSE: S) represented, respectively, 14 percent, 11 percent and 10 percent of Alcatel-Lucent's revenues (it was, respectively, 12 percent, 11 percent and 10 percent in 2013). However, AT&T and Verizon have largely finished their respective macro LTE buildouts.
In the U.S., Nokia, Alcatel-Lucent and Samsung are providing 8T8R radios for Sprint's tri-band Spark LTE service. That project is continuing through at least 2015. Meanwhile, Nokia is also helping T-Mobile US (NYSE:TMUS) enhance its LTE network and implement carrier aggregation as well as expand LTE network coverage.
Just this week, speculation emerged that Nokia is looking to sell is HERE mapping unit and use the proceeds for a deal with Alcatel-Lucent. Nokia sold its handset division to Microsoft (NASDAQ: MSFT) last year and now relies on its network business for around 85 percent of its sales (Nokia also has a technology and patent-licensing unit).
Alcatel-Lucent has been nursing itself back to financial health after years of losses following the 2006 merger that brought together Alcatel of France and Lucent Technologies of the United States. Under CEO Michel Combes, the company has undertaken a massive cost-cutting effort called the "Shift Plan." The goal of the program has been to return the company to positive cash flow in 2015. Under the program, Alcatel-Lucent has focused on IP networking, broadband access, LTE and small cells, as well massive cutting of fixed costs and around 10,000 jobs. The company has also exited unprofitable managed services deals and sold assets worth around $633 million.
Clairinvest fund manager Ion-Marc Valahu said he was skeptical of the merits of the proposed deal. "They could come up with some cost cuts, but just because you combine one weak player with another weak player does not necessarily mean that you will end up with a stronger player," he told Reuters.
"A merger would mean major risks for Nokia on future costs, as they also have to negotiate with the French government," Mikael Rautanen, an analyst at Inderes Equity Research, told Reuters. "An acquisition of Alcatel's wireless division would be much easier. But the deal would be an excellent getaway for Alcatel-Lucent from its difficulties."
It's unclear if the French government, which has long protected Alcatel and Alcatel-Lucent as national assets, will agree to approve the deal. "The government will be very vigilant regarding the possible consequences on employment and activity at the French sites of Alcatel-Lucent, notably in research and development, as well as the effects on the entire telecoms sector in France," the economy ministry said, according to the WSJ. The ministry said Alcatel-Lucent holds a "structural position" in telecom equipment and networks.
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