Nokia (NOK) is to buy Alcatel-Lucent (ALU) in an all-share deal that values its smaller French rival at 15.6 billion euros ($16.6 billion), building up its telecom equipment business to compete with market leader Ericsson.
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Nokia's takeover of Alcatel-Lucent will redefine a telecom equipment sector suffering weak growth prospects and pressure from low-cost Chinese players Huawei [HWT.UL] and ZTE.
The combined company will have about 114,000 employees and combined sales of around 26 billion euros. In mobile equipment it will rank a strong second, with global market share of 35 percent, behind Sweden's Ericsson with 40 percent and ahead of Huawei's 20 percent, according to Bernstein Research.
The new Nokia will have stronger exposure to the important North American market, with key contracts with AT&T and Verizon.
It will also fill gaps in its product portfolio by getting Alcatel-Lucent's technology in optical transmission and Internet routers, which help telecom operators handle the ever-increasing volume of data brought on by users surfing the web on their smartphones and watching Netflix at home.
While Huawei does have a complete product line across both fixed and mobile, Ericsson does not and may have to react with deal-making or partnerships, executives said.
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Nokia will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their old shares, putting 33.5 percent of the entity in Alcatel shareholders' hands if the tender offer is fully taken up.
The deal will be finalised in the first half of 2016 and is expected to result in 900 million euros of operating cost savings by the end of 2019, the companies said on Wednesday.
Nokia shares rose 1.4 percent at 1149 GMT, while Alcatel-Lucent fell 11.2 percent, reversing trends on Tuesday when the talks were first acknowledged by the companies.
Alcatel shareholders were disappointed because they hoped for a part-cash offer, while Nokia holders were relieved that the group had not overpaid, a trader said.
Nokia initially approached Alcatel-Lucent about buying only the wireless business but was rebuffed, leading to the broader deal, Alcatel boss Michel Combes told Reuters in an interview.
The deal carries significant risks, however. The track record of mergers in the sector - including the two that gave birth to Nokia and Alcatel-Lucent a decade ago - has been poor. Prior deals were plagued by the difficulty of cutting costs in an R&D intensive business, rivals stealing contracts while the companies were distracted by their integrations, and struggles over power within the married firms.
Nokia CEO Rajeev Suri sought to reassure.
"This is not a joint venture, so there will be no governance issues," he said on a call with investors. "We will take a no politics, no nonsense approach to running the business, and have learned from past mistakes."
FRENCH JOBS PLEDGE
Nokia pledged to keep France as "a vibrant center of the combined company" and not to cut jobs beyond what Alcatel had already planned, especially protecting research and development sites at Villarceaux and Lannion.
Alcatel-Lucent has some 6,000 employees in France. Maintaining jobs was a key demand of the French state for its backing of the deal, but that raised concerns over job cuts in Finland where Nokia employs about 6,900.
"At first the deal sounded like very good news. But given that there will likely be job cuts, and the fact that it is much more expensive to lay off people in France than in Finland, the outlook is not that bright anymore," said Pertti Porokari, the head of Finnish engineers' union.
"I truly hope that Finnish politicians would also show some patriotism here."
The Finnish government refrained from demands over job protection but underlined the Nordic country's know-how in technology.
Nokia sold its once-dominant mobile phone handset business to Microsoft last year after struggling to compete with smartphones by Apple and Samsung. That deal left it with the network unit, a smaller map unit and a portfolio of technology patents.
Nokia said its growth profile would improve from the deal and predicted a sales growth rate of about 3.5 percent for 2014 to 2019. Nevertheless some investors remained concerned.
"The integration will be a difficult task, it will easily take a year or two, and the management group must focus on it heavily. For an investor seeking returns this year, it is clear that Nokia looks less interesting after this move," said Juha Varis, a fund manager at Danske Capital whose fund owned 0.06 percent of Nokia shares as of end-March.
He also said that leaving France out of the cost-cutting program must have a negative impact to the corporate culture.
Other analysts, however, said that Nokia and CEO Suri have a good record on restructuring.
"There is no reason to doubt that this deal too wouldn't increase shareholder value... We know that there are risks related to France and the cost cuts, but I believe that Nokia has calculated a margin of safety to the deal price," said strategist Jukka Oksaharju from Nordnet brokerage.
Separately, Nokia confirmed it was exploring the sale of its HERE mapping unit, which some analysts value at up to 6.9 billion euros. It also said further asset sales could be undertaken once the deal was completed.
JPMorgan advised Nokia on the takeover, and boutique investment bank Zaoui & Co. advised Alcatel-Lucent.
($1 = 0.9411 euros)