Nokia has unveiled a €15.6 billion (US$16.6 billion) all-stock offer for rival networks vendor Alcatel-Lucent just a day after the two players confirmed they were in talks over a deal. (See Nokia, Alcatel-Lucent in Merger Talks.)
A merger would produce an equipment giant making nearly €26 billion ($27.7 billion) in annual revenues and with the scale to challenge Sweden's Ericsson AB (Nasdaq: ERIC) and China's Huawei Technologies Co. Ltd. in some of the most important geographical and product markets. (See Nokia/AlcaLu: The Key Friction Points and How Do Nokia & Alcatel-Lucent Stack Up?)
In a statement released Wednesday morning, Nokia Corp. (NYSE: NOK) said the bid would take the form of an all-share transaction, offering 0.55 of a new Nokia share for every Alcatel-Lucent (NYSE: ALU) share. The value of the deal is based on the Nokia stock closing price of €7.77 on Monday April 13, which in turn values each Alcatel-Lucent share at €4.27. Nokia noted that is a 28% premium to the average Alcatel-Lucent share price for the previous three months (with that average price being €3.35).
That deal would leave Alcatel-Lucent shareholders with 33.5% of the combined company and Nokia shareholders with the remaining 66.5%.
Each company's board of directors has already approved the deal, expecting it to close in the first half of 2016, but it has yet to secure the backing of shareholders and could still hit opposition from regulatory authorities.
The offer did not meet the immediate expectations of Alcatel-Lucent investors, however. Following Tuesday's news that a deal was in the works, Alcatel-Lucent's share price had soared on the Euronext Paris exchange by more than 16% to €4.48 in anticipation of a possible deal.
But news that the agreed offer is an all-stock transaction equivalent to €4.27 per share, with no cash involved, sent AlcaLu's share price tumbling by 11% to €3.99.
Should it go ahead, the Alcatel-Lucent name will disappear entirely, with the enlarged Nokia Corp. continuing to operate its headquarters from Finland but gaining a major corporate presence in France.
Nokia CEO Rajeev Suri will lead the combined entity, while Nokia chairman Risto Siilasmaa will remain in his role. Three employees from Alcatel-Lucent are to serve on a board of directors comprising nine or ten members and one of these will serve as vice chairman, said Nokia.
Based on 2014 earnings, the combined entity would have had net sales of €25.9 billion ($27.6 billion) -- making it slightly bigger than Ericsson at current exchange rates -- an operating profit of €300 million ($319 million) and about €7.4 billion ($7.9 billion) in net cash on its books.
Nokia believes it can realize operating cost synergies of €900 million ($958 million) on a full-year basis in 2019 as a result of the tie-up and is also hoping to slash interest expenses by €200 million ($213 million) on a full-year basis in 2017, by which stage it expects the transaction to be earnings accretive.
Both Suri and Alcatel-Lucent CEO Michel Combes have also emphasized the attractions of the deal from an R&D and sales perspective.
According to Nokia's own estimates, the addressable market of the combined company in 2014 would be have been 50% larger than for Nokia alone -- rising from €84 billion ($89 billion) to €130 billion ($138 billion) in value. The Finnish player expects to be able to increase sales at a compound annual growth rate of about 3.5% over the 2014-19 period should the deal go ahead.
Suri has also been attracted to the research capabilities of Alcatel-Lucent's Bell Labs division. A new-look Nokia would have about 40,000 employees involved in R&D activities -- based on 2014 figures -- and be able to invest some €4.7 billion ($5 billion) in R&D annually.
That capability could make a huge difference given the R&D might of equipment rivals. Last year, Sweden's Ericsson spent $4.1 billion on R&D, while Huawei invested as much as $6.6 billion in this area.
"It'll be interesting to see customer reaction," said Heavy Reading senior analyst Gabriel Brown after Nokia and Alcatel-Lucent had first confirmed they were in talks. "They need financially successful suppliers that can afford the vast R&D budgets you need to be effective in networking. On the other hand, this will reduce competition for their business and create uncertainty about product roadmaps." (See Nokia + AlcaLu: What the Analysts Say.)
In a separate statement, Nokia also said it had initiated "a review of strategic options" for its HERE mapping business following speculation the unit might be up for sale.
The Finnish player said it was the "right moment" to assess HERE's position given the proposed tie-up with Alcatel-Lucent.
Earlier this week, press reports had linked Uber, the company behind the famous taxi-hailing app, with a potential acquisition of HERE. (See Eurobites: Ericsson Takes 5G on the Buses.)
More about Nokia and Alcatel-Lucent deal:
- Nokia, Alcatel-Lucent in Merger Talks
- Nokia/AlcaLu: The Key Friction Points
- Nokia + AlcaLu: What the Analysts Say
- How Do Nokia & Alcatel-Lucent Stack Up?
— Iain Morris, , News Editor, Light Reading