Alcatel Snags Nortel 3G Unit

Alcatel (NYSE: ALA; Paris: CGEP:PA) has agreed to buy Nortel Networks Ltd. 's UMTS (3G) access business and assets for $320 million, the two vendors announced this morning. (See Alcatel to Buy Nortel's UMTS.)

The two companies have been in talks for some time, but the agreed price will surprise some industry observers. Analysts at French outfit Oddo Securities had put a price tag of around €1 billion ($1.28 billion) on Nortel's complete UMTS business, including core network and next generation development assets, but believed the UMTS access assets to be worth between €400 million and €500 million ($513 million to $640 million). (See Is Alcatel Moving on Nortel Mobile Assets?.)

Alcatel was holding fire on any further comment until it hosts a conference call at 2pm Paris time (8am Eastern) today, but did state that the deal would make Alcatel the number three UMTS vendor, behind Ericsson AB (Nasdaq: ERIC) and a combined Nokia Corp. (NYSE: NOK) and Siemens Communications Group . (See Nokia, Siemens Create Networks Giant.)

Nortel has about 10 percent of the UMTS market, while Alcatel has about 4 percent. Alcatel's bride-to-be, Lucent Technologies Inc. (NYSE: LU), has another 2 percent, while the market leaders have in excess of 30 percent market share each.

Specific details about the deal are scarce, though. An Alcatel spokesman said negotiations about issues such as the number of staff to be transferred are still in progress. Nortel also declined to comment on headcount issues, and both companies declined to discuss the financial performance of the UMTS business.

Recent Nortel financial reports show that Nortel's combined GSM and UMTS businesses generated $723 million in revenues in the three months to June 30 this year, and $2.8 billion in the whole of 2005, when it recorded a tiny loss before tax of $4 million.

This deal, though, is for the UMTS (3G) access business only (technology, people, and 15 customers), an area where the company lacked "the scale and momentum needed to become profitable,” stated Nortel CEO Mike Zafirovski in a prepared statement.

That means Nortel is hanging on to, and will continue to develop and support, its GSM access and core, GPRS, EDGE, UMTS core, and CDMA wireless infrastructure businesses.

And the company plans to be a significant player in next generation, or 4G, wireless infrastructure, which will be a completely different ballgame, says Scott Wickware, VP of strategy and marketing at Nortel's mobility and converged core networks division.

Wickware says Nortel sees the 4G landscape as one dominated by three technologies – WiMax (802.16e), CDMA DO (data only) Revision C, and UTRAN LTE (long term evolution) – which will all offer increased performance at reduced cost compared with today's 3G technologies.

All these technologies are based on OFDM (orthogonal frequency-division multiplexing), in which Nortel has been investing for some years, says Wickware, adding that the vendor has also been developing MIMO (Multiple Input Multiple Output) antenna capabilities to further enhance OFDM's capabilities. (See All Hail OFDMA!, Multiple Antennas Key to Mobile Broadband, Nortel Bolsters WiMax Position, and Nortel Touts HSOPA.)

Wickware says Nortel is developing a common platform for WiMax, CDMA DO Rev. C, and LTE, "so we'll have the scale to compete even if we are not that successful in one of the three approaches."

He says Nortel will be marketing these technologies to the UMTS customers it has gained over the years, such as Orange France . "We'll still have a relationship with these operators, as we sell more than just UMTS access to them. And we know that, by selling the UMTS business to Alcatel, those customers will be well taken care of for their UMTS access needs."

Nortel is also handing over another relationship as part of the sale, as UMTS access is a key part of the vendor's joint venture with Korean firm LG Electronics Inc. (London: LGLD; Korea: 6657.KS) . Alcatel will supply the UMTS access equipment to the Korean venture, says the Nortel man. (See Nortel, LG Seal Deal and Nortel's Owens: Krazy About Korea.)

That's if the sale goes through, of course. Today's announcement is of a "non-binding Memorandum of Understanding," and Nortel has a checkered recent history in pre-announcing non-binding deals. (See Nortel, Huawei Kill JV and Nokia Invests in China 3G.)

But Wickware says there's no definitive agreement at the moment only because some of the details are being ironed out. "This is what both parties intend to do. We're not looking to do anything else."

But should the deal go through, at least one analyst believes Alcatel will have its work cut out in sending a clear message to the world's mobile operators.

“If it goes through on top of the Lucent deal, this will be extraordinarily challenging," says Heavy Reading senior analyst Patrick Donegan. "It’s difficult to think of a precedent for an undertaking of this scale and complexity. What platform evolution story are they going to come up with for their existing UMTS customers? What product are they going to pitch in new UMTS bid opportunities? Alcatel’s management will need to provide convincing answers, and quickly. If they can’t, then the UMTS business won’t get anything like the new traction that they are seeking.”

It's also worth noting that, in addition to Alcatel, Nortel, Lucent and LG, a fifth party is directly affected by this deal, as Alcatel has a GSM/UMTS joint venture with Fujitsu Ltd. (Tokyo: 6702; London: FUJ; OTC: FJTSY) called Evolium. (See Alcatel, Fujitsu Demo HSDPA and Alcatel Evolves Fujitsu Deal.)

It seems, though, that Alcatel is buying out Fujitsu's 34 percent stake in that venture for an unspecified sum, according to an Alcatel spokesman.

— Ray Le Maistre, International News Editor, Light Reading