Nokia share price up, confirms Alcatel-Lucent acquisition to compete with Ericsson

Finnish telecommunications equipment maker Nokia Oyj will acquire smaller French rival Alcatel-Lucent SA in an all-stock deal, creating a group that would better compete with Sweden’s Ericsson, the industry leader, and China’s Huawei Technologies.

According to the deal, approved by each companys Board of Directors, Nokia will issue and distribute 0.55 shares for each outstanding Alcatel-Lucent share, giving the French groups shareholders a 33.5% stake in the combined entity, assuming full acceptance of the public exchange offer. Nokia shareholders will own the remaining 66.5%.

The all-stock deal, expected to be finalized in the first half of 2016, values Alcatel-Lucent at €15.6 billion on a fully diluted basis. The combined entity, which will be called Nokia Corporation, will be headquartered in Finland but with a strong presence in France. It will operate under existing Chairman Risto Siilasmaa and Chief Executive Rajeev Suri, but will maintain strong research facilities in France and nominate a vice chairman from Alcatel-Lucent.

The agreement comes after months of talks and years of speculations about a possible consolidation, and investors had voiced concerns that the acquisition may face troubles with securing political approval, given the French government’s reluctance to sell key national businesses and the connected job cuts that often accompany such cost-saving deals.

Nokia said it expects France to remain a “vibrant centre of the combined company”, and pledged to be an important contributor to the overall development of the broader technology ecosystem and a driver of innovation in France. The Finnish company also said it doesnt intend to cut jobs beyond what Alcatel had already planned, consistent with the French groups end-2015 Shift Plan commitments. In addition, Nokia plans to expand R&D employment with the addition of several hundred new positions targeting recent graduates with skills in future-oriented technologies, including 5G, it said.

“A combination of Nokia and Alcatel-Lucent will offer a unique opportunity to create a European champion and global leader in ultra-broadband, IP networking and cloud applications,” Alcatel CEO Michel Combes said. “I am proud that the joined forces of Nokia and Alcatel-Lucent are ready to accelerate our strategic vision.”

Industry experts had voiced concern about the integration process as both companies were formed as a result of cross-border mergers that required significant restructuring efforts.

Nokia’s telecommunications-equipment unit struggled for years in what was a tricky joint venture between the Finnish group’s infrastructure operations and that of Siemens AG. Meanwhile, Alcatel-Lucent combined French and US companies and has been going through a prolonged restructuring process to lift falling sales in its core home markets.

A combination between the two creates a company with more than 110 000 employees worldwide and a total 2014 revenue of €25.9 billion, roughly the same as Ericsson’s. Huawei’s telephone-carrier equipment business generated revenue of about €23.6 billion last year. Global market share will amount to 35%, compared to 40% and 20% for Swedens Ericsson and Chinas Huawei, respectively.

Cost savings will be a major factor in the deal. The two companies are targeting approximately €900 million in annual operating cost synergies in 2019 by rationalizing overlapping products and services, overall general and administrative expenses, various overhead costs in real estate and others. The combined company will also aim to reduce yearly interest rate expenses by €200 million in 2017.

“Our innovation capability will be extraordinary, bringing together the R&D engine of Nokia with that of Alcatel-Lucent and its iconic Bell Labs,” said Rajeev Suri, President and Chief Executive Officer of Nokia. “We will continue to combine this strength with the highly efficient, lean operations needed to compete on a global scale.”

Alcatel shares tumbled on Wednesday, paring Tuesdays 16% jump, as Alcatel shareholders had hoped for a part-cash deal, while holders of Nokia stock greeted the all-stock agreement.

Nokia Oyj traded 1.74% higher at €7.62 per share at 09:07 GMT in Helsinki, marking a one-year increase of 53.90%, after a 3.6% drop on Tuesday to €7.49.

Meanwhile, Alcatel Lucent SA traded 11.94% lower at €3.95 per share in Paris, trimming its one-year jump to 51.19%. The stock soared 16.00% yesterday to €4.481.