U.S. wireless carriers to face fewer vendor options as Nokia moves to buy Alcatel-Lucent

Nokia (NYSE:NOK) agreed to purchase Alcatel-Lucent (NYSE: ALU) in a $16.6 billion (€15.6 billion) deal that would form a powerhouse to rival Ericsson (NASDAQ: ERIC) and Huawei in the global market for telecom equipment. In the United States, the deal could create a company that could challenge Ericsson's leading position.

Nokia also confirmed that it has started a review of its strategic options, including a potential sale of its HERE mapping business--making it clear that the company wants to focus squarely on networks going forward.

"Together, Alcatel-Lucent and Nokia intend to lead in next-generation network technology and services," Suri said in a statement. "We will have a strong presence in every part of the world, including leading positions in the United States and China."

"A combination of Nokia and Alcatel-Lucent will offer a unique opportunity to create a European champion and global leader in ultra-broadband, IP networking and cloud applications," and Alcatel-Lucent CEO Michel Combes said in a statement. "I am proud that the joined forces of Nokia and Alcatel-Lucent are ready to accelerate our strategic vision, giving us the financial strength and critical scale needed to achieve our transformation and invest in and develop the next generation of network technology."

Click here for the PDF of the full presentation from the companies.

For U.S. carriers, the combination will mean one less vendor to work with. Ericsson has long dominated the U.S. market, and it works with all four Tier 1 U.S. carriers. Meantime, Huawei and ZTE are effectively barred from gaining deals with big U.S. carriers over national security concerns, which the Chinese vendors say are unfounded. This situation could push more business to a combined Nokia and Alcatel-Lucent, or it could provide more opportunities for smaller rivals like Samsung.

Click here for the PDF of the full presentation from the companies.

Alcatel-Lucent has longstanding partnerships with both Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE:T) in the United States. That business will likely be transferred to Nokia, which will see its position in North America significantly strengthened as a result of its purchase of Alcatel-Lucent.

In the U.S., Nokia, Alcatel-Lucent and Samsung are providing 8T8R radios for Sprint's (NYSE: 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.

"Nokia and Alcatel-Lucent have had a defining impact on the United States communications industry," the companies said in a statement. "As long-standing technology partners of the U.S. service providers and with a re-energized Bell Labs research and consultancy, the proposed combined company would have technological depth in all strategic domains combined with formidable operational strength. 

Under the terms of the deal, Nokia said it will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their existing shares. Once the deal closes, which the companies expect to happen in the first half of 2016, Nokia would own 66.5 percent of the combined company and Alcatel-Lucent shareholders would control 33.5 percent.

Combes told Reuters Nokia initially wanted to buy just Alcatel-Lucent's wireless access business, but he rejected that offer, saying it was not in the best long-term interests of the company. "Nokia approached us about mobile and I judged that this was not the best solution for the group and its future," he told Reuters. "With the advent of 5G in the next decade, telecom vendors need to be present in all parts of the mobile business: the basestation, backhaul and Internet routers," he added.

Click here for the PDF of the full presentation from the companies.

The combined company would have sales of around $27.4 billion, based on 2014 figures, putting it ahead of Ericsson's $25.9 billion. The combined company will be called Nokia Corporation, with headquarters in Finland and a strong presence in France. Risto Siilasmaa is expected to serve as chairman and Nokia CEO Rajeev Suri will be the new company's CEO. The companies expect to achieve around $951 million in operating cost synergies by 2019. Although the combined firm would have more than 114,000 employees, the company is likely going to cut jobs once the deal closes. The firms said they will engage in "organizational streamlining, rationalization of overlapping products and services, central functions and regional and sales organizations." 

Click here for the PDF of the full presentation from the companies.

Nokia will likely seek to divest some assets after it takes over Alcatel-Lucent, which had already exited unprofitable managed services deals and sold assets worth around $633 million. "We will undertake in due course a detailed review of the combined company portfolio to identify any possible divestment opportunities and non-core assets," Nokia CFO Timo Ihamuotila told a conference call, according to Reuters.

The deal is likely going to get the blessing of the French government, which had increasingly come to see Alcatel-Lucent facing an uphill battle to survive as a standalone entity, Bloomberg noted. "It's a good deal for Alcatel-Lucent because it's a deal for the future," Economy Minister Emmanuel Macron said Tuesday, after meeting with Suri and Combes at the Elysee palace in Paris, according to Bloomberg. "There was some restructuring of the company but it can't face increasingly fierce international competition in terms of 5G and Chinese players such as Huawei and ZTE on its own."

The combined company expects to have a presence in France that spans leading innovation activities including a 5G/small cell research and development center; a cyber-security lab similar to its existing facility in Berlin designed to support European collaboration on the topic; and a continued focus on Bell Labs and wireless R&D. Nokia also expects to establish a $106 million investment fund to invest in start-ups in France with a focus on the Internet of Things and the Industrial Internet.

For more:
- see this Nokia site
- see this Nokia/Alcatel-Lucent release
- see this Nokia release
- see this NYT article
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see these two separate Reuters articles

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