Evaluating the prospect of owning part of the new nokia
Investors in Alcatel expected a premium and some cash as part of the Nokia offer. Although they did not get either of these, the prospect of owning part of the new Nokia is better than some might think, in our view
- The terms of Nokia's offer were not as good as expected by investors, with Alcatel shareholders owning 33.5% of the new entity vs expectations for about 40%.
This would value Alcatel at €4.1 using the Nokia share price of €7.5 – in-line with our base case price target – thus with no premium, while Nokia takes control of Alcatel.
- While the terms have disappointed Alcatel shareholders, the prospect of owning part of the new Nokia could prove more compelling than at first sight.
Our pro-forma models for Nokia published today suggest that the deal should be 25% accretive in 2017 – and the share price of Nokia has certainly not reacted to that kind of positive outcome. We also found that should Nokia's enlarged networks business rerate to the same EV/sales multiple as Ericsson, this would imply 15% upside to the current Nokia share price. In a separate note we upgrade Nokia from Equal-weight to Overweight. We acknowledge that owning a long-dated restructuring story with a patent story on the side is not as exciting as the idea of Michel Combes driving Alcatel ex Wireless into a phase of growth. However, a recommended deal such as this, including endorsement from the French President, is unlikely to meet with any obstacles to completion.
- Nokia shares are not pricing in the better earnings prospects or the strong product positioning of the new enlarged group.
We previously thought that Nokia's product portfolio was too narrow with only wireless and no exposure to the US. With Alcatel, the new Nokia has the full gamut of world-class products in wireless, IP routing, optical and access, not the patchy product portfolio of the old Alcatel-Lucent or Nokia Siemens.