Technology

How Nokia Could Have Over 60% Upside After the Alcatel-Lucent Merger

Even before Friday’s drop, there had been a 6% decline for the Argus Communications Equipment peer group. And Nokia’s shares fell by 11% in 2015, versus a 7% peer-group decline, while its American depositary shares fell 3% in 2014 and soared 105% in 2013 — more than doubling the 45% gain of the peer group.

Argus went on to say:

Nokia has undergone significant transformation, including exiting the mobile device business, and the acquisition of Alcatel-Lucent is the culmination of this transformation. In recent years, Nokia consolidated all ownership in the former Nokia Siemens JV; sold its once-invincible mobile device business to Microsoft; and divested its HERE (mapping) business to a consortium of German automakers. … Nokia has now become a leading player in IP Core, optical, and access networks. Nokia’s ability to deliver comprehensive and integrated solutions to public network operators and other carriers, in our view, optimally positions the company to build next-generation network architectures while expanding its existing business.

The all-stock transaction valued Alcatel-Lucent at €15.6 billion ($17.6 billion). Once all shares are acquired, the Nokia shareholder group pre-merger will own 66.5% of the combined outfit. The combined company will start with about 104,000 employees, down from 114,000 at the time of the mid-April announcement. Nokia also was said to have worked with the French government to protect roughly 7,000 French jobs. The combined company will be roughly the same size as Ericsson and Huawei on a revenue basis, and each of these three should command about 17% to 18% of the total communications service provider capital spend in hardware, software and services.

Speaking of the bumps along the way to the integration: Argus noted that not all of these revenues are equal in value. The Nokia wireless networks business integration is projected to result in loss of value on Alcatel-Lucent’s wireless access business. Potential opposition from workers councils regarding any planned layoffs in Europe is another risk. And for more risks, Argus said:

Alcatel never did achieve desired synergies from the combination with Lucent. Nokia must make hard choices on product rationalization, particularly on the wireless networks side; it will face similar challenges in creating an optimal go-to-market organization. If the communications infrastructure market were to slow meaningfully, Nokia would need to make massive cuts in plant and personnel.


Argus expects that total 2015 pro forma combined revenue would be about 10% to 11% lower than 2014 pro forma revenue of €24.7 billion, with much of that reflecting currency impacts. Argus went on to say:

Nokia estimates that the addressable market for the combined company will be about 130 billion euros, up 50% from 84 billion euros for Nokia alone. Management further believes that this market can grow at 3.5% CAGR for the 2014-2019 period, which is slightly faster than the forecast CAGR for stand-alone Nokia.

There will be room for more buybacks and dividends as well. Nokia previously suspended its €5 billion capital structure optimization plan from 2014, but in late 2015 Nokia’s new €7 billion capital plan was set with €4 billion in shareholder returns in buybacks and dividends and €3 billion in deleveraging. As part of its capital allocation plan, Nokia intends to pay a 2015 ordinary dividend of at least €0.15 per share and expects that its 2016 ordinary dividend will be at least €0.15 per share. Argus values these payouts to be about $0.17 for U.S. investors for each year.

So, how does Argus value Nokia post-merger? It’s complicated. Nokia currently is valued at 19.3 times Argus’s 2015 non-IFRS estimate and at 20.5 times its unrevised 2016 non-IFRS estimate, while the average two-year forward price-to-earnings (P/E) ratio is above the historical P/E of 16.5. The firm concluded:

Based on our unadjusted DFCF model, the Nokia ADRs are valued in the high-single to low-double digits. After factoring in our historical comparables valuation and applying a 15% country discount, we calculate a value of approximately $12 per ADR; the total return now also includes the current dividend yield of 2%. Our 12-month risk-adjusted total-return forecast for Nokia now exceeds our forecast total return for the broad market and is thus consistent with a Buy rating.

Note that rival Cisco Systems is valued at closer to 10 times its non-GAAP earnings estimates ahead.

24/7 Wall St. also wanted to see what else was in store for a combined Nokia/Alcatel-Lucent outfit via other recent research reports at competing firms. They were mostly positive as well ahead of the merger completion:

  • Credit Suisse raised Nokia to Outperform from Neutral on December 1, 2015.
  • BMO Capital Markets raised Nokia to Outperform from Market Perform on November 4, 2015.
  • CLSA started Nokia as Buy on September 22, 2015.
  • Deutsche Bank raised Nokia to Buy from Hold on September 21, 2015.
  • Goldman Sachs already had a Buy rating but added Nokia to its prized Conviction Buy list on September 14, 2015.

So, now you know the most bullish research case for the combined Nokia and Alcatel-Lucent. In New York, the stock closed most recently at $7.16, within a 52-week trading range of $5.71 to $8.37.

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