Nokia and Alcatel-Lucent: The Merger...A Bumpy Ride or Smooth Sailing? (Full note attached)
Highlights
In today's note we present our view on how bumpy the ride could be through to completion and execution of
the merger between Nokia and Alcatel-Lucent.
We find the risk of the deal being renegotiated or falling through is real but slim; playing more the Alcatel-
Lucent than the Nokia side is an easy way to hedge one's self against it. On the commercial front, China is
the only place where we see material pain looming. In particular, we happily ignore comments by Nokia's
CEO on pricing pressure – they are to us just ways to limit the bargaining power of Alcatel-Lucent's
shareholders and to signal coming pain in China. In terms of demand, we actually expect the second half of
the year to be supportive, although newsflow risk related to China could hurt the stocks and will need to be
carefully monitored in 2H. Lastly, the IPO of Alcatel-Lucent's submarine business and the sale of Nokia's
maps business are likely to progress in the meantime, driving some upside on our current expectations.
In conclusion, we reiterate our strong conviction: playing the merger now makes sense, preferably on the
Alcatel-Lucent side. Recent valuation levels offer significant upside and we expect the stocks to work
rapidly as the longer term potential of the merger gets recognised by investors.
Timing of the close and related risks:
* The deal is expected to close in the first half of 2016. Although the "red tape" around the merger is heavy
and justifies a long lead time, we don't see material regulatory risks in any region.
* There is a risk that Alcatel-Lucent shareholders ask for better conditions or refuse to bring their shares to
the deal. Some have expressed dissatisfaction with the exchange ratio and we agree that Alcatel-Lucent
could have received better conditions. We nevertheless believe chances of a renegotiation to succeed or
to lead to the deal falling through are slim: Alcatel-Lucent shareholders have limited long term
alternatives and Nokia's Board understands that well.
* Given the real nature of this risk, we believe that Alcatel-Lucent remains the better way to play the
merger and hedge these risks: it would benefit from a renegotiation and is marginally more attractive on a
standalone valuation basis.