Diving Deeper into a Nokia Corporation (ADR) (NOK) and Alcatel-Lucent SA (ADR) (ALU) Hookup

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  • NOK hopes that it will be able to save up to EUR900 million on costs by fiscal 2019
  • Nokia looks forward to stripping about EUR200 million from interest expenses by fiscal 2017
  • Expects the deal to be accretive to its earnings by fiscal 2017, pretty fast considering that the transaction is expected to close in 2016

Nokia Corporation (ADR) (NYSE:NOK) is pursuing Alcatel-Lucent SA (ADR) (NYSE:ALU) in an all-stock transaction valued at about EUR15.6 billion ($16.6 billion). The confirmation of the buyout talks comes at a time when both Nokia and Alcatel-Lucent are looking for new growth amid intense competition in their respective mainstay. There are several benefits that could come from the transaction, but there are also challenges that could slowdown the realization of any potential benefits.

At this moment the finer details of the deal aren’t clear, but at the very least Alcatel-Lucent investors will be in for a 28% premium on their equity holding.

The transaction is expected to close the first half of 2016 with hope that the deal will be accretive to earnings by 2017. There is every justification to be hopeful about the success of the acquisition, but past deals including those involving Nokia and Alcatel-Lucent in separate transactions should make investors cautiously optimistic.

Stock dilution

The deal stipulates that for every share of Alcatel-Lucent, shareholders will receive 0.55 of newly-issued Nokia shares. At the close of the transaction, shareholders of Alcatel-Lucent will own 33.5% of equity stake in the combined company. Nokia shareholders will own 66.5% of the fully diluted shares of the combined entity.

The merger deal between Nokia Corporation (ADR) (NYSE:NOK) and Alcatel-Lucent is complicated by the convertible notes on the side of the latter. Nevertheless, the enterprise value of the transaction stands at EUR15.6 billion, meaning an offer of EUR4.27 per share of Alcatel-Lucent.

Adequate resources

Nokia Corporation (ADR) (NYSE:NOK) is going into the deal with Alcatel-Lucent confident of its financial position. The company fetched nearly $7.4 billion from the sales of its handsets business to Microsoft Corporation (NASDAQ:MSFT). Nokia is also flexible enough to offload more non-core assets to unlock funds, which would even result in an optimized portfolio and greater focus on the networking business.

As of the end of 2014, Nokia had EUR7.98 billion in the bank.

Nokia’s expectations

Nokia Corporation (ADR) (NYSE:NOK) has very ambitious targets for the deal with Alcatel-Lucent. The company hopes that it will be able to save up to EUR900 million on costs by fiscal 2019. Further to that, Nokia looks forward to stripping about EUR200 million from interest expenses by fiscal 2017.

On contribution to earnings, Nokia expects the acquisition of Alcatel-Lucent to be accretive to its earnings by fiscal 2017, pretty fast considering that the transaction is expected to close in 2016.

Ultimately, Nokia hopes that the deal will begin the pathway to enable it to return to investment-grade status. The company will suspend stock repurchase but continue paying out dividends.

Areas of concern

As ambitious as Nokia Corporation (ADR) (NYSE:NOK) is about acquiring Alcatel-Lucent, the real benefits of the transaction will depend on how deep and fast the companies can integrate. That is one major challenge given the complexity of integrating different operating platforms and cultures.

Benefits of the deal will also depend on how fast the combined company is able to strip out costs, which have been soaring on both sides. Nokia will also have to deal with the complexities posed by the tricky European labor laws.

There seems to be minimal synergies in the deal, taking into account that the premise of the transaction is Wireless. Another large challenge to that is the length of time it takes to build a common Wireless platform, which means that the benefit of moving fast for greater synergies could dodge Nokia.

The negative experience of the past deals of Nokia/Siemens and Alcatel/Lucent deals also show how aggressively pursued deals can actively destroy shareholder value in the end, especially where there are many moving parts and the scope of integration looks overwhelming.

Nokia’s turnaround may be slower than expected after the deal because of the limited scope in headcount adjustment considering it is not going to retrench workers in France, which is where ALU has the bulk of its workforce. Too aggressive a restructuring could result in French government push-backs.

Alcatel-Lucent and Nokia Corporation (ADR) (NYSE:NOK) are both mature corporations with their ingrained and unique culture. There is no doubt a possibility of culture clash in the creation of a unified entity, especially give that the French workforce inherited from Alcatel-Lucent will remain largely intact.

Impressive move from competition standpoint

Nokia is headed to achieving a larger scale, which is great for inking major deals such as with carriers like Verizon Communications Inc (NYSE:VZ) and AT&T Inc. (NYSE:T). The combined company is expected to have annual sales of about $27 billion. The much larger Nokia will also be well-situated to take on rivals like Ericsson (ADR) (NASDAQ:ERIC) and Huawei.

Nokia Corporation (ADR) (NYSE:NOK) is a company well-known for its ability to turn around struggling operations. A case in point here is the company’s own Nokia Networks, which has become its largest unit since offloading the mobile division. If Nokia’s proven track record is anything to go by, the company deserves the benefit of the doubt as it works to bring Alcatel-Lucent under its armpit.

HERE mapping business

Nokia Corporation (ADR) (NYSE:NOK) is exploring options for its struggling HERE mapping unit. The company could end up selling the mapping business or enter into a strategic deal with another partner. Whether Nokia sells HERE completely or enters into partnership for the unit, the result is that the company will have managed to eliminate significant cost burdens, unlock new funds and become a more focused company.

HERE business is valued at $2.1 billion and its technology is used by mostly automobile manufacturers and Microsoft in its various hardware products. Microsoft may want to buy HERE map to bolster its handset business that it acquired from Nokia.

Conclusion

The proposed combination of Nokia Corporation (ADR) (NYSE:NOK) and Alcatel-Lucent elicits mixed feelings. The potential benefits of such an arrangement are obviously huge if things move at the right pace. However, considering that there are a lot of things beyond the control of Nokia, especially the issue of rigid European labor laws, there is no clarity on what exactly to expect.

Another thing that may push investors to the sidelines for now is that specifics of the transaction are yet to be disclosed.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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