NSN Deal Hits AlcaLu Stock
AlcaLu's stock was down $0.27, or 9.85 percent, at $2.47, in afternoon trading on the NYSE after Merrill Lynch & Co. Inc. issued a downgrade Monday morning. The brokerage house cut the company's rating from Neutral to Underperform, partly in light of the NSN deal. (See Nortel: It's All Up for Sale.)
"A stronger ex-Nortel business challenges Alcatel-Lucent in its most profitable region," Merrill said.
Alcatel-Lucent is the largest player in the CDMA market with roughly 40 percent share. Nortel, however, is second in the sector with a 20 percent share, which rises to 30 percent when looking at North America alone. (See NSN Picks at Nortel's Mobile Bones .) "The loser side of the equation is pretty clearly Alcatel-Lucent," writes Heavy Reading's Patrick Donegan in a commentary on the buyout. (See NSN & Nortel: AlcaLu Loses Out.) "Carrots and sticks from U.S. wireless carriers will have quite a lot more impact now that NSN comes to the LTE table with a CDMA portfolio in its back pocket, as well as 400 mostly North America-based LTE engineers," Donegan continues. "Alcatel-Lucent therefore emerges from this deal with less margin for error in delivering on its CDMA and LTE roadmaps with the right features and at the right price points."
Then again, some analysts question how much effect a deal that rests on a declining CDMA business can really have. "This acquisition looks like closing the stable door after horse has bolted as the biggest customer [Verizon] has already been lost to Ericsson AB (Nasdaq: ERIC) and the other appears at risk," writes Nomura Securities analyst Richard Windsor in a research note.
He expects that Nortel's CDMA revenues of $1.5 billion in 2009 will decline to zero by 2023. This would represent a 16.3 percent return on the $650 million NSN is investing in the deal. "The possibility, however remote, to win some market share in LTE is the icing on the cake," Windsor writes. (See Nortel's LTE Brain Drain and NSN: Is Verizon on the Horizon?)
— Dan Jones, Site Editor, Unstrung