Telecom & Wireless

Why Nokia and Alcatel-Lucent Could Be Dead Money Until 2016

The Alcatel-Lucent S.A. (NYSE: ALU) and Nokia Corp. (NYSE: NOK) merger is practically regarded as a done deal. However, one key analyst doesn’t see this combined company going anywhere in the near future, based on the current valuation and plans going forward. In fact, Argus maintained its Hold rating for Nokia, but what matters here is why the firm thinks this combined company will be dead money for the time being.

In its third quarter, Nokia posted a 2% decline in revenue. Also sales were down 10% in constant currency and adjusted for M&A. Revenue in constant currency was negatively impacted by weakness in North America and Europe, while demand from China was notably strong.

However, investors barely made note of the third-quarter results, considering the growing focus on the pending acquisition of Alcatel-Lucent. That deal has won regulatory clearance and is on track to be completed in the first quarter of 2016. Expressing confidence that the deal will go through as planned, Nokia in early October announced the senior leadership team for the combined company.

One takeaway from this is that both Nokia and Alcatel-Lucent are now trading on deal arbitrage rather than fundamentals.

The combination already has become accepted in the marketplace. At the same time, the wireless networks market has slowed. Argus is unlikely to take a more aggressive stance on the Nokia until the deal is concluded or (highly unlikely) not concluded.

Concurrent with its third-quarter results release, Nokia pushed forward its target date for achieving 900 million in annualized cost savings to 2018 from an initial target date of 2019. Nokia also announced a €7 billion plan to optimize its capital structure.

ALSO READ: 10 Brands That Will Disappear in 2016

According to Argus:

The plan includes 4 billion euros in shareholder distributions, including buybacks and dividends. Elements of the shareholder distribution include a 2015 ordinary dividend of at least 0.15 euros per share, subject to shareholder approval in 2016; and a 2016 ordinary dividend of at least 0.15 euros per share, subject to shareholder approval in 2017. Nokia also intends to pay a 0.10 special dividend, subject to shareholder approval in 2016. Finally, Nokia intends to implement a 1.5 billion euro share repurchase program with a two-year term, subject to shareholder approval in 2016.

The capital plan also calls for a 3 billion euro reduction in debt. Financing for the capital allocation and deleveraging program is partly dependent on 3 billion euros in proceeds from the HERE sale to a consortium of German automakers, comprising Audi BG, BMW Group and Daimler AG.

Ultimately, while Argus believes the worst of the wireless infrastructure slowdown has passed, the firm expects a gradual, rather than an immediate, recovery in this business.

Shares of Alcatel-Lucent were trading at $4.08 Wednesday, with a consensus analyst price target of $4.39 and a 52-week trading range of $3.03 to $4.96.

Nokia shares were trading at $7.56, with a consensus price target of $8.86 and a 52-week range of $5.71 to $8.37.

ALSO READ: 3 Tech Stocks to Buy for a Possible Year-End Rally