* Optionality on successful merger, multiple value drivers
Following the Alcatel-Lucent deal announcement, we see compelling long-term strategic rationale in creating a global network equipment supplier with top 3 market shares in key ‘convergence’ verticals. Based on historic precedents, the magnitude of regional overlap and Nokia’s strong cost-cutting track record, we view management’s EUR900m cost synergy guidance as conservative. We see further potential value unlocking via a HERE disposal, a potential debt refinancing (5-9% accretive to proforma EPS), IPR monetisation and EUR0.4/share in tax assets.
* Cost savings bull case could double the share price
Should management execute on (in our view conservative) cost synergy targets, proforma Networks operating margins could improve from ~10% pre synergies to >13% post synergies by 2019. Adding potential upside from beating on its cost savings target and refinancing at 4% or less, we estimate proforma 2019 EPS could be EUR0.65 to EUR0.85. Applying a market P/E of 15x the stock could be worth EUR11.5 to 14.4/share in 2018. Discounted back this would imply a potential 2015 share price range of EUR9.4 to 11.8; 29 to 63% upside from current levels.
* 5 scenarios for the stock - all with upside, in our view
We view the sell-off since deal announcement as unjustified as we see 5 dealrelated scenarios for the share price with 10-62% upside: 1) Deal bull case - Nokia beats cost savings target by 100% and refinances at 2% - EUR11.8/share. 2) Deal base case – Nokia delivers on savings target – EUR9.4/share.3) Deal bear case – cost savings are neutralised by revenue/share loss – EUR8.3/share. 4) The deal fails to close, Nokia still sells HERE and increases IPR monetisation to 50bps – we see fair value at EUR8.5) The full transaction fails to close, but Nokia may still buy Alcatel’s wireless business as previously highlighted – we see upside top EUR10.4.