Catalysts And Snags For Nokia Corporation (ADR) (NYSE:NOK)


As part of the strategy to simplify its business model, Nokia Corporation (ADR) (NYSE:NOK) sold out its devices and services unit to Microsoft Corporation (NASDAQ:MSFT). The company streamlined its structure to focus on just three main business segments, namely Nokia Networks, HERE mapping and Nokia Technologies.

A little more than a year after the sale of the handsets unit, Nokia seems to be getting better, just as the management envisioned when a decision was made to offload the devices operations. Now it appears that the sale of the handsets business was just the beginning of strategic transactions to reform and strengthen Nokia. What the company has up its sleeve is a pending union with French telecommunications equipment maker Alcatel Lucent SA (ADR) (NYSE:ALU).

Looking at the reactions of Nokia’s telecommunications equipment rivals following the announcement of the deal with Alcatel Lucent, there is a fair chance the deal could be a game-changer. Both Huawei and Ericsson (ADR) (NASDAQ:ERIC) appear to have panicked and are currently trying to disorientate Nokia by waging pricing wars. However, their moves seem to be too little too late because they can only drive price wars before Nokia completes the pending transaction. Looking at various indications, it is highly likely that Nokia will close the deal with Alcatel-Lucent.

Growth catalysts for Nokia

The Deal with Alcatel-Lucent (ALU)

There is a fair chance that the Nokia Corporation (ADR) (NYSE:NOK) will successfully complete the acquisition of Alcatel-Lucent. The companies have already secured the clearance of the U.S. Department of Justice to go ahead with the transaction. Other U.S. agencies weighing on the buyout are likely to follow the precedent set by the DoJ in the Nokia- Alcatel-Lucent issue.

More than 20 competition authorities are expected to weigh in on Nokia-Alcatel-Lucent deal, including the European Union and China. In addition to the U.S. Department of Justice, Nokia and Alcatel-Lucent have also obtained clearance from authorities in Serbia and Brazil.

If all goes according to plan, Nokia and Alcatel-Lucent hope to close the takeover transaction in the first half of 2016. Nokia is offering 15.6 billion Euros to gobble the whole of Alcatel-Lucent, although it had initially attempted to only acquire the wireless assets of Alcatel-Lucent.

Benefits of the transaction

Combining Nokia and Alcatel-Lucent is expected to lead to the second-largest mobile equipment maker on the planet. The resulting combined entity is poised to control 35% of the wireless equipment market, only behind Ericsson that controls about 40% of the market.

The larger market share in the wireless equipment segment is expected to give Nokia total annual revenue of about 29 billion Euros. Nokia generated revenue of 12.7 billion Euros in 2014 while Alcatel-Lucent posted revenue of 13.2 billion euros in the same year.

Cost-saving advantages: Nokia Corporation (ADR) (NYSE:NOK) and Alcatel-Lucent are hoping to save 900 million Euros in costs annually, starting in 2019 once the transaction is closed.

Cash balance boost: The acquisition of Alcatel-Lucent is also expected to boost Nokia’s cash balance. Alcatel-Lucent finished the first quarter 2015 with 5.9 billion euros in cash and equivalents. Nokia had 7.98 billion euros in cash at the end of the same period.

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Expanded product portfolio: Acquisition of Alcatel-Lucent is going to expand Nokia’s line of routers, switches and optical transmission products. Nokia will also benefit from Alcatel-Lucent technologies such as small cells that are used by wireless carriers to decongest their networks. Alcatel-Lucent will also add advanced technology research capabilities to Nokia, booting development of future products.

Strong U.S. position: Alcatel-Lucent is one of top-ranked players in the U.S. mobile equipment market. The company also enjoys long-standing contracts with leading U.S. wireless carriers AT&T Inc. (NYSE:T) and Verizon Communications In. (NYSE:VZ). Because of these, the acquisition of Alcatel-Lucent is going to give Nokia a solid base to build upon for future growth in the U.S.

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The other exciting thing about having a stronger position in the U.S. is that carriers in the market invest huge amounts of money to bolster their network quality amid intense competition.

Nokia Networks gains

Nokia Corporation (ADR) (NYSE:NOK) has continued to register consistent profitability gains in its Networks arms. The company operates two segments under the Networks division, namely Mobile Broadband and Global services. The Mobile Broadband sub-segment has particularly shown strength in recent times. The business is tracking well and there is a fair chance the sub-segment could turn strong, positive EBIT in the upcoming quarter (second quarter of 2015), rising from a negative territory.

HERE business assessment and potential

HERE is likely to improve earnings sequentially when second quarter results are released. The reason for optimism in HERE is that the actively level in the unit has been fairly strong in recent times.

Nokia Corporation (ADR) (NYSE:NOK) is doing a strategic review of HERE and the company might decide to either keep or sell the business. Already, several potential buyers have shown interest in HERE, including automakers that already use the technology.

A revamped HERE could still fetch more revenue and profitability gains for Nokia. Selling the asset could also generate about 3.0 to 3.5 billion Euros for Nokia.

Nokia Technologies in deals

Nokia entered into a technology licensing contract with LG Electronics. The companies have sent their agreement to the arbitrator for finalization of the deal. It is unlikely that the patent licensing agreement with LG will lead to an immediate revenue boost to Nokia. However, after about one or two years the benefits of the agreement should start showing.

The patents being acquired by LG are related to smartphone technology. Smartphones accounted for 72% of LG’s handset sales in 2014. That means that Nokia will be in for substantial royalty revenue from LG under the new patent deal.

Potential adverse impacts for Nokia

The Elliott factor in NOK/ALU deal:

Activist investor Elliott Management has reportedly acquired a stake equivalent to 1.3% in Alcatel-Lucent, ahead of the union with Nokia. Elliot hasn’t disclosed its intention in the acquisition, but it is possible the investor could challenge Nokia’s price offer for Alcatel-Lucent in the pending transaction.

Alcatel-Lucent and Nokia are pursuing a deal where ALU shareholders would get 0.55 of new Nokia shares for each Alcatel-Lucent share. The deal values Alcatel-Lucent at 15.6 billion Euros.

Already, Alcatel-Lucent’s second-largest shareholder, Odey Asset, with a stake of about 5.5%, had earlier argued that Nokia’s offer for Alcatel-Lucent is not sufficient. Elliott could weigh in on the issue of insufficient buyout price more strongly, making demands for a sweeter offer.

It is all clear that Elliott’s move in Alcatel-Lucent could be a snag for Nokia in closing the transaction with Alcatel-Lucent.

Pressures are rising:

Nokia Corporation (ADR) (NYSE:NOK) faces competition pressure from Huawei and Ericsson. The companies have jumped on competitive pricing amid slow growth in the high margin markets. They are also using competitive pricing to grab more share of the market ahead of the Alcatel-Lucent/Nokia union. Displacement due to wireless customer consolidation is also leading to aggressive pricing.

The management of Nokia holds out that pricing pressures are temporary in nature and doesn’t expect material dent on the company fortunes. It is likely that Nokia will turn tables on rivals in their pricing war after it closes the transaction with Alcatel-Lucent.

Bottom line

In the short-term, Nokia Corporation (ADR) (NYSE:NOK) will likely face intense pressure from rivals, but it should subdue them over time, because of expanded capacity and more operational efficiencies. These gains should also lead to significant lift in Nokia’s share price over time.

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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