Nokia in Advanced Talks to buy rival Alcatel-Lucent

Finnish telecommunications-equipment maker Nokia Corp. is in advanced talks to purchase French rival Alcatel-Lucent SA, the two companies said Tuesday, a deal that would create a new global networking behemoth to rival Sweden’s Ericsson and China’s Huawei Technologies.

The deal currently under consideration is a “full combination” that would entail Nokia making a public offer for Alcatel-Lucent stock, the companies said. The deal could still fall apart, they added.

It isn’t clear if the parties have agreed on a valuation. Alcatel-Lucent’s market capitalization stands at roughly EUR11 billion ($11.63 billion), while Nokia’s market capitalization is about EUR28 billion.

In response to the statement, Alcatel-Lucent’s shares rose 13% to EUR4.38 in morning trading in Paris, while Nokia shares fell 7.3% to EUR7.205.

A Nokia-Alcatel merger deal would cap years of speculation about a possible tie-up between the two firms, and reshape the telecommunications-equipment business by creating a company with a combined 2014 revenue of EUR25.9 billion and more than 100,000 employees in businesses spanning wireless communications and Internet routing.

Market leader Ericsson reported revenue of EUR25.1 billion in 2014, while Huawei’s telephone-carrier equipment business had revenue of about EUR23.6 billion, at average exchange rates for the year.

Cisco, which competes with Alcatel in Internet routing, amid its broader enterprise and consumer businesses, had revenue of $47.1 billion for the year ending July 26.

A purchase of Alcatel-Lucent by Nokia could face a tricky political dance in France. French officials have promoted the idea of creating pan-European giants to compete globally, in the model of Franco-German aerospace firm Airbus. But Alcatel-Lucent is also a major employer and symbolic of French industry.

One French government official said that any deal involving Alcatel-Lucent would likely have to be structured to keep a significant French influence in the new company for the deal to pass muster in Paris.

A spokeswoman for Economy Minister Emmanuel Macron declined to comment.

The timing of any deal remains unclear, but the two companies will face shareholders in the next few weeks. Nokia holds its annual shareholder meeting on May 5, while Alcatel-Lucent is scheduled to hold its meeting on May 26.

The possible French-Finnish tie-up would join two companies that are only recently emerging from a troubled wave of consolidation nearly a decade ago. At the time, the companies were suffering from a price war with Chinese firms. Since then, Huawei has roughly tripled the revenue of its business selling gear to telecommunications firms.

Nokia’s telecommunications-equipment unit struggled for years in what was an awkward joint venture with Siemens AG, forcing a brutal round of staff cuts and restructuring to return to profit. Nokia bought Siemens out of the newly profitable company in 2013, after agreeing to sell its cellphone handset business to Microsoft Corp.

Alcatel-Lucent meantime has lurched through repeated restructuring plans and asset sales as it burned cash. Created in 2006 in the merger of France’s Alcatel and the U.S.’s Lucent Technologies, a spinout from the old AT&T, it is only in 2015 finally on track to post positive free cash flow.

For Nokia, a deal would be a way to gain market share in the competitive wireless business against Ericsson in the profitable U.S. market, where Alcatel-Lucent has historical roots and long-standing relationships with Verizon Communications Inc. and AT&T Inc. It would also add Alcatel-Lucent’s fast-growing Internet routing business, which is one of the firm’s profit engines that analysts are counting on for future growth. Nokia’s equipment business has since its restructuring focused solely on wireless networking.

Alcatel-Lucent’s wireless business has been a sore spot. Its market share has slowly dwindled in part from lost contracts in Europe. Big spending from carriers in the U.S. and China on new high-speed LTE networks helped boost revenue in recent years, but with some of those build-outs rolling down, revenue in the division was down 9% on-year in the fourth quarter.

Source: MarketWatch