Will the merger between Nokia and Alcatel-Lucent create value?
In the past, big mergers in the telecom equipment sector have been extremely painful. Nokia and Siemens took five years to fully turn around, and Alcatel-Lucent should finally do so by year-end, after nine years of intense restructuring. The groups struggled with cultural and product integrations, while management leadership (particularly at Alcatel-Lucent) was unclear in the initial phases of the mergers. Despite strong deal rationale and large potential value creation in the medium term, both stocks have been under pressure since the deal was announced, as investors fear a long, difficult and uncertain integration process and question the potential value creation over the medium term.
Yes, we see strong value creation mid-term with 40% upside ahead
We believe the merger between Nokia and Alcatel-Lucent makes a lot of strategic sense, because: 1) the new group will be uniquely positioned to address operators’ fixed-to-mobile convergence strategy (leading market position in wireless access, IP routing, optics, FTTH, virtualisation, services); 2) it will benefit from a larger scale effect and a more diversified presence; and 3) the EUR900m synergy target looks credible. Contrary to past mega-mergers in the sector, execution risk looks relatively low, as product overlap remains limited (only affecting a few clients in wireless access), the two groups now have lean cost structures and Nokia’s management is taking a clear leadership role in the group, with its strong record of integration and execution. Overall, we believe the merger could create significant value for shareholders in the medium term, with a fair value of over EUR12 per share by 2019E (90% upside) and EUR9 now (40% upside). We have Buy ratings on both Alcatel-Lucent and Nokia, but Alcatel-Lucent remains our preference for playing the merger.