Analysts: Alcatel Got a Bargain
Analysts following the deal in the past month or so had valued Nortel's assets much higher. Inder Singh at Prudential Equity Group LLC said in a research note issued today that the agreed $320 million price tag puts the sale at between 1.5 and 1.6 times 2005 sales but had expected Nortel to bag "up to $500 million" for the business.
Neither Nortel nor Alcatel has divulged any details about the financial state of the business that's changing hands, though on a conference call today Nortel's CEO Mike Zafirovski said the combined revenues for UMTS access and core generated less than 10 percent of Nortel's total sales, putting it anywhere south of $1 billion. The Prudential analyst's figure puts Nortel UMTS access business at a current annual run rate of between $200 million and $215 million.
Singh estimates that, with Nortel's business on board, Alcatel would hold a 9.5 percent share of the global UMTS access business in the first half of 2006, trailing Ericsson AB (Nasdaq: ERIC) at 36 percent, a combined Nokia Corp. (NYSE: NOK) and Siemens Communications Group with 30 percent, and NEC Corp. (Tokyo: 6701) with 13 percent.
And in a note issued earlier this week and forwarded to Light Reading, TD Newcrest analyst Chris Umiastowski also valued the business at $500 million and cited industry sources that suggested Nortel's UMTS access business is losing about $200 million per year, or about 4 cents of earnings per share.
"We believe that the sale of the UMTS business would be a positive for Nortel and would be well received by the Street," wrote Umiastowski.
But it's clear there is little consensus about the exact size of Nortel's unit and how much of the market Alcatel will command after the acquisition, which it hopes to close before the end of the year, around the same time it is due to merge with Lucent Technologies Inc. (NYSE: LU), barring disruptions to that process. (See Alcatel Lucent Merger Under Fire.)
Nomura Securities analyst Richard Windsor, in a note emailed to clients today, believes Alcatel has landed Nortel's business at "an attractive price, about 1 times sales."
He estimates that Alcatel, on its own, is heading for about 8 percent market share, and that the Nortel business gives it a further 7 percent, while Lucent Technologies Inc. (NYSE: LU) brings a further 5 percent. Should both deals go through, Alcatel would hold about 20 percent of a UMTS access market worth nearly $4.6 billion annually, and growing.
Investors seemed to agree that getting out of UMTS access is a good idea for Nortel, as the company's share price inched up today by 2 cents, or 1 percent, to $2.11.
— Ray Le Maistre, International News Editor, Light Reading
Nobody knows anything except the price. Here's a briefy list of deal terms we don't know, all of which affect deal value:
1. Is Alcatel buying intellectual property, or just buying a license to intellectual property that Nortel will continue to own? If it's a license, is it exclusive? For how long? Is fully paid-up, or will Alcatel have to pay royalties going forward?
2. Is the deal contingent on certain key employees going to Alcatel?
3. What kind of pension or other employee-related liabilities will Alcatel assume?
4. Who's on the hook for servicing the current installed base and warranties and bugs that go with it? For how long? What kind of reps and warranties is Nortel making as to the functionality of the installed base and the merchantability of the products?
5. How much does Alcatel have to pay Nortel for "transition services" (e.g., IT and HR support) while the business moves from Nortel to Alacatel?
6. Is there any kind of joint development agreement for future products?
Lots of questions with no answers--hard to say what the "business" is worth when we don't know exactly what the deal does and doesn't include.