Nokia (NOK1V FH) for Alcatel-Lucent (ALU FP)
Altering terms?
PDF attached
After Nokia sold the D&S business, Nokia shareholders bought into a cash return story. Instead, in April 15, Nokia shareholders were placed in a path to partaking in an (arguably) more exciting integration story. The current proposal at 0.55 Nokia per ALU share is structured with no cash component to remain disciplined financially (says the company) and to continue to chase investment credit rate (currently Nokia is just outside investment grade at BB+).
The industrial rationale for Nokia/Alcatel particularly Nokia Networks + ALU Access seems strong. It is no secret that demand for data and network capacity using mobile devices is massive. Networks “currently predicts that worldwide mobile data traffic can be approximately 1,000 times that of 2010 before the year 2020”.
The need from mobile operators for the products and services Networks+Access offer exists but competition is intense. Cisco Systems,
Ericsson, Fujitsu, Huawei, Nokia, Alcatel-Lucent, Samsung, ZTE,
Adtran, Calix, Ciena and Juniper are all competitors therefore price is important. Scale matters and with ALU Access, Nokia could add >60pct to its Networks revenue base plus a larger pool of key skilled personnel. Scale also helps Nokia to respond to a more selective list of operators as consolidation of companies (Orange for Jazztel, Vodafone for Kabel etc) continues. The evident overlaps between Nokia and ALU are within the networks segment.
Nokia is also acquiring ALU IP Networking business and cloud-based applications. Makes sense in a world where critical services, applications and data may move to the cloud and IP routing failures or architecture becomes increasingly important. We note that such shift may require larger and larger data centers. The Nokia/ALU merger illustrates why the ongoing takeover of Telecity has logic. To a lesser extent it also puts the spot-light on cloud companies like Iomart, who received a withdrawn offer from CVC last September.
Nokia however is proposing ALU shareholders accept a low premium. When Nokia announced the merger, the undisturbed price was Eur3.86 Alcatel vs Eur7.77 Nokia. On ratio 0.55 the equivalent offer was Eur4.27 thus premium was only equivalent to 11pct.
The ALU recognisable deferred tax assets amount to Eur13.7bn. (ALU’s own adjusted tax loss carry forward is Eur11.4bn). From merger precedents, we know that not all of the deferred tax assets could be used by Nokia to offset profit. Attaching value to deferred tax is an approximation exercise, but if only 10% is operational in nature and can be used in the respective tax jurisdictions, the ALU deferred tax value to Nokia could be the same as the proposed Eur1.1bn premium on offer (Eur0.41 x 2824 outs shares) or Eur1.5bn if using fully diluted ALU shares
That is even before one talks about the cost synergies to be derived from the deal. ALU shareholders are unlikely to perceive the current offer as good value in our view.