Nokia Bets $16.6 Billion in Alcatel Deal Creating Network Leader

Updated on
Nokia to Buy Alcatel-Lucent in All Share Deal

Nokia Oyj agreed to buy Alcatel-Lucent SA in an all-stock transaction valued at 15.6 billion euros ($16.6 billion) to create the biggest maker of equipment that underpins mobile-phone networks.

Nokia’s biggest acquisition would result in a supplier that surpasses Ericsson AB and Huawei Technologies Co. in wireless-infrastructure revenue. Nokia Chief Executive Officer Rajeev Suri, who will run the enlarged company, will bolster its position in China, a market of 1.3 billion mobile subscribers, and take on contracts with the two biggest U.S. carriers -- Verizon Communications Inc. and AT&T Inc.

The next challenge for Nokia is to convince Alcatel investors, regulators and trade unions the deal will make the company stronger without leading to a network provider that is too dominant. Each company has sold units and slashed tens of thousands of jobs in recent years as carriers curbed spending.

“This is not a combination starting on weakness,” Suri said on a conference call. “We’re both over our respective restructuring plans and we have momentum in the market.”

Alcatel investors will receive 0.55 Nokia share for each stock they own, the companies said Wednesday. The deal values Alcatel at 4.12 euros per share, 8 percent less than the most recent closing price. The stock fell 11 percent to 3.98 euros at 1:52 p.m. in Paris after soaring 16 percent on Tuesday. Nokia rose 1.2 percent to 7.58 euros in Helsinki.

Nokia, based in Espoo, Finland, also said it started a strategic review for its HERE maps business. Bids are expected soon for the unit, which is valued by Nokia at about 2 billion euros and has attracted interest from companies and private-equity firms, people familiar with the matter have said.

Record Deal

The takeover lets Nokia add products used to transmit landline and Internet traffic, giving it a more complete offering to sell to carriers as the amount of data traveling on networks increases with the popularity of Netflix and other video and music services. Devices from cars to refrigerators are also getting connected to wireless networks.

“We knew we were the best in mobile broadband, but we lacked the rest,” Nokia Chairman Risto Siilasmaa said on the call. “We examined all options over many months, but Alcatel-Lucent was a unique opportunity.”

The combined company will be called Nokia and Siilasmaa will continue in his position. Alcatel CEO Michel Combes is leaving the company and will remain a shareholder. Alcatel shareholders will own 33.5 percent of the company and Nokia investors the remainder.

Industry’s Biggest

If completed, the deal will be the industry’s biggest since at least 1999, when Lucent Technologies Inc. bought Ascend Communications Inc. for about $21 billion, according to data compiled by Bloomberg.

It would also be comparable to the transaction that created today’s Alcatel: the French company’s purchase of Lucent in 2006 for $13.4 billion, according to Bloomberg data. The deal would top Nokia’s record acquisition of map provider Navteq Corp. for about $8 billion in 2008, and the biggest by a Finnish company.

Nokia and Alcatel have more than 110,000 workers combined. Suri, who took over as head of Nokia’s networks unit in 2009 and became group CEO last year, has revived the equipment business by cutting more than 25,000 jobs over three years and focusing on more lucrative contracts. He said the takeover will result in “some impact on headcount.”

French Jobs

While France’s government doesn’t own a significant stake in Alcatel -- one of its investment arms holds 3.25 percent according to data compiled by Bloomberg -- it is concerned about what will happen to the approximately 7,000 people who work for the company in the country. Suri is in Paris this week to negotiate those details and his itinerary included a meeting with President Francois Hollande.

Economy Minister Emmanuel Macron said Tuesday the government will closely monitor any consequences the deal may have on jobs, and will seek to make sure the transaction helps build a viable European champion.

“The discussion with the French government was easy,” Combes said in an interview. “We said we’d keep the same number of factories in France because we have the right size, but we will be transfering staff to R&D,” which is “something that was needed by Nokia.”

Savings Targeted

The companies expect to complete the deal in the first half of 2016. They are seeking savings of 900 million euros a year, to be achieved in 2019. They also expect about 200 million euros of reductions in interest expenses a year starting in 2017. The companies’ combined sales last year were about 26 billion euros.

Nokia said it will look at divestment opportunities after the takeover. Alcatel’s submarine-cable business, which the company earmarked for a spinoff last year, is set to become an independent entity, Combes said.

Alcatel lost billions of dollars in the years following its 2006 merger with Lucent as it struggled to revive sales.

“Two years ago, Alcatel-Lucent was almost bankrupt with only some intellectual property rights buying it some bank financing,” Macron said.

Still, Alcatel shares have more than tripled since Combes became CEO in 2013 as he cut costs and landed contracts from new customers. Combes has less than eight months left of his three-year turnaround plan, aimed at making Alcatel profitable.

Phone Giant

Sweden’s Ericsson is now the largest maker of wireless-network gear -- which includes equipment such as base stations and antennas that transmit calls and data -- with a market share of 25.7 percent in 2014, according to IDC. Huawei had 23.2 percent, Nokia 15.8 percent and Alcatel 11.4 percent share.

Founded as a wood-pulp mill in 1865, Nokia’s transformations have included switches from rubber boots and toilet paper to cables, televisions, computers and mobile phones. It was the world’s largest handset maker -- with a market value reaching 300 billion euros -- before Apple Inc. and Samsung Electronics Co. claimed its leadership.

Nokia shares have more than doubled since the company agreed to sell its mobile-phone business to Microsoft Corp. in 2013 for about $7.5 billion. That deal left Nokia with net cash of about 5 billion euros at the end of last year.

JPMorgan Chase & Co. advised Nokia, and Skadden Arps Slate Meagher & Flom LLP is serving as its legal adviser. Financial advisory boutique Zaoui & Co. is assisting Alcatel, as is law firm Sullivan & Cromwell LLP.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE