Reports from French newspaper Les Echos and Bloomberg state that Nokia is in advanced discussions with Alcatel to buy its Wireless business. This is not the first time that such a deal has been discussed in the press.
While neither company has confirmed the press reports, such a deal could be positive for Alcatel, as Wireless lacks scale globally despite its strong position in the US. In addition, the unit has lost money in previous years, though management has said it is bringing it to breakeven this year. Such a deal, if it happens, could be transformative for Alcatel as it could make it a € 10bn revenue, 11-12% EBIT margin market share gainer / grower with a strong IP routing / optical / access positioning and less volatility on earnings. Should this occur, it could conceivably lead to a re-rating of the shares toward our €5 bull case price target, in our view. Bloomberg also states that a full merger with Alcatel has been discussed but reported that a wireless asset sale is currently the most likely deal.
We believe the current share price implies a value of around €1bn or 0.2xEV/sales for wireless, and that any value above this would be a positive surprise for investors. The price would be important for the future of Alcatel, its share price and its deleveraging but details around a potential transaction would be key and, in our view, the market would look for clarity on the following:
1. the size of the US pension fund and OPEB transferred to Nokia – please note that Alcatel is in process of reducing the size of the pension fund
2. the number of employees in France that would be part of a potential transaction and the potential approval from the French government
3. consideration of the cash in the China JV Alcatel Shanghai Bell
4. should the small cells be part or not of the deal

