NOKIA Corporation; Market Cap (as of 17/04/2015): €26.3bn

Alcatel-Lucent; Market Cap (as of 17/04/2015): €10.5bn

 Introduction

On April 15, the Finnish multinational company Nokia agreed to buy the French company Alcatel-Lucent in an all-shares transaction valued at €15.6bn. The deal aims at creating a future innovation leader in the technology and services industry, merging together two national industrial champions in order to create a unique European telecoms equipment group that is estimated to worth more than €40bn.

 

Nokia Corporation

Nokia is a Finnish multinational communications and information technology company founded in 1865 operating in more than 120 countries and producing annual revenues of around €12.7bn. Originally born as a manufacturer of pulp and paper, Nokia, during its life, drastically changed its business: the company was involved in several industries including integrated cable operations, electronics, tires, and rubber footwear. Nokia has been also highly involved in the mobile telephony services, participating in the development of the GSM (Global System for Mobile Communications) and LTE (Long-term Evolution) standards, and had been, for few years, the main vendor of mobile phones in the world before being overshadowed by the smartphone producers Apple and Samsung. The firm has always opted for inorganic growth: since the ‘80s Nokia has acquired numerous companies, the latest of which was the takeover of the joint-venture with the mobile and fixed line phone network equipment of Siemens in 2013. More recently, in 2014 Nokia entered in a deal with Microsoft and sold almost all of its weakened mobile phone devices and services business to the American company, thus completely reshaping the company’s business model towards technology development and licensing, large-scale telecommunications infrastructures, and online mapping services.

 

Alcatel–Lucent

Alcatel–Lucent is a French telecommunications equipment company headquartered in Boulogne-Billancourt and born in 2006 as a result of the merger between the French Alcatel and the US-based Lucent, the former equipment arm of AT&T. The company operates in the mobile, fixed, IP technologies, software and services. Alcatel-Lucent is a partner of service providers, enterprises, industries, and government all over the globe, and it also owns Bell Laboratories, one of the biggest centres of research in communication technology. The French company is active in more than 130 countries, and it operates mainly in three business divisions: networks, applications and services. Similarly to Nokia, the French company has been shaped over the years by many deals: for instance, in 2010 the company sold its Vacuum pump solutions and instruments business, and it acquired OpenPlug, a mobile software and applications developments tools vendor, and ProgrammableWeb.

 

The Rationale

This transaction can offer substantial tangible benefits to both companies. Thanks to the merger Nokia could leverage Alcatel-Lucent’s strong base in the US, which is one of the most profitable market for telecoms equipment, thus being able to widen its margins, broaden its potential customer base, and increase its global footprint and its competitiveness. Indeed, the addressable market of the combined company in 2015 will be approximately 50% larger than the current one for Nokia alone and, as a result, Nokia expects to strengthen its growth profile with an estimated CAGR of approximately 3.5% for the 2014-2019 period. Moreover, a very reasonable target of €900m in operating cost synergies (just one tenth of the operating costs) to be achieved on a full year basis in 2019 will create a long-term structural cost advantage while another €200m of reductions in interest expenses will push the combined entity towards Nokia’s long term target to return to an investment grade credit rating.

 

A European Champion to Face Global Challenges

With about 114,000 employees and sales of around €26bn, the combined company will become the world’s second biggest network equipment-maker. According to Bernstein Research, the new European champion will reach a market share of 35% threatening Ericsson’s 40% and well ahead the 20% of the Chinese giant Huawei. The combined company will have unparalleled innovation capabilities, with Alcatel-Lucent’s Bell Labs and Nokia’s FutureWorks, as well as Nokia Technologies, which will stay as a separate entity with a clear focus on licensing and the incubation of new technologies. With more than 40,000 R&D employees and €4.7bn spent in R&D in 2014, it will be in a position to accelerate development of future technologies including 5G, IP and software-defined networking, cloud, analytics as well as sensors and imaging.

 

The Deal in Details

The transaction will be structured as a public exchange offer in accordance with the General Regulation of the AMF, the French regulator, by which 0.55 of a Nokia Corporation’s newly issued ordinary share would be offered in exchange for either one Alcatel-Lucent’s ordinary share, both issued and outstanding (stock options), or one American Depositary Shares. An equivalent offer will be made also for each Alcatel-Lucent’s outstanding convertible bond. Assuming a full acceptance, Nokia will own 66.5% while Alcatel-Lucent 33.5% of the fully diluted share capital of the combined entity. The agreed all-share takeover gives the French company an enterprise value of €15.6bn on a fully diluted basis, corresponding to a premium to shareholders of 28% (equivalent to €4.27 per share) based on Alcatel-Lucent’s weighted average share price of the previous three months. The resulting Nokia Corporation will still be headquartered in Finland, with strategic business locations and major R&D centres in France, and operating units in many other countries including Germany, the United States and China.

 

Market and Stakeholders Reactions

Despite the strong potential of the deal the market seems to be sceptical: on Wednesday Nokia shares fell 1.5% adding to Tuesday’s 3.6% fall, while Alcatel-Lucent fell 15.5% giving up most of the gains it made on Tuesday when the talks were first acknowledged by the companies. Indeed, Nokia and Alcatel-Lucent are themselves the result of consolidations, and both have suffered through difficult mergers a decade ago. Moreover, the deal has to face political concerns for what regards possible impact on the level of employment. The French government has always been inclined to step in when French companies have been taken over and Nokia has thus intention to maintain head count in France according to Alcatel-Lucent business plan, beyond hiring 500 research staffers over the next 4 years and creating a €100m investment fund for start-ups in France. This agreement has raised many worries in Nokia’s homeland since, in order to achieve the cost savings target, the company will have to intervene in countries other than France, thus putting at risk other jobs in Finland after the restructuring process occurred at the beginning of the 2010s. Finally, the deal is subject to shareholders and regulatory approval and it is expected to close in the first half of 2016.

 

Advisors

J.P. Morgan served as financial advisor to Nokia. Zaoui & Co acted as lead M&A advisor to Alcatel-Lucent.

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