Nokia in advanced talks over bid for Alcatel-Lucent

Nokia is in advanced talks to launch a takeover bid for all of Alcatel-Lucent as the Finnish telecoms equipment company seeks to challenge the industry leader Ericsson.

A deal would represent a remarkable turnround for Nokia, which just two years ago was in severe financial difficulties before selling its once world-beating mobile phone division to Microsoft. The Finnish group has since returned to a more stable footing and its share price has quadrupled since its low in 2012 when there were investor concerns about it running out of cash

Nokia said on Tuesday that it was "in advanced discussions with respect to a potential full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent". But it cautioned that there was no certainty an agreement would be reached.

Shares in Nokia opened down almost 7 per cent in Helsinki at €7.25, while Alcatel jumped 14 per cent to €4.39 in early Paris trading

A combined Nokia- Alcatel would have had revenues of €26bn last year, about the same as Ericsson's SKr228bn.

Profitability is harder to compare as both Nokia and Alcatel have undergone deep restructurings recently. Nokia's operating profit was €170m in 2014 but its net profit was €1.2bn thanks to tax benefits, while Alcatel achieved an operating profit was €572m but it recorded a net loss of €83m. Ericsson had an operating profit of SKr16.8bn (€1.8bn) and net income of SKr11.1bn.

A deal between Nokia, which has a market capitalisation of €29bn, and Franco-American Alcatel-Lucent, which is worth €11bn, has long been rumoured.

But some industry experts have expressed concern about potential integration issues between the two companies, which were both formed as a result of tricky cross-border mergers and have required substantial restructuring efforts in recent years.

Nokia's telecoms business is a combination of the Finnish group's infrastructure operations and that of Siemens, the German conglomerate, while Alcatel-Lucent brought together French and US companies.

The Finnish company's takeover offer highlights its return to growth and appetite to expand following the handset sale.

A deal would significantly boost Nokia's market share in the wireless infrastructure business as Alcatel's wireless unit generated about $5bn in revenues last year.

Nokia is competing against China's Huawei and Sweden's Ericsson for contracts to supply next-generation mobile equipment to network operators. Huawei and Ericsson are neck and neck in the race to become the telecoms equipment industry's biggest group by revenue.

Rajeev Suri, Nokia's chief executive, has predicted that the industry would in time be reduced to as few as three companies given the competitive pressures it faces.

Alcatel, which has struggled since the merger of France's Alcatel with Lucent Technologies of the US, is going through a lengthy restructuring process to turn round falling sales in its core markets in the US and Europe. The company, led by chief executive Michel Combes, has begun to improve its profitability amid deep cost-cutting.

One person familiar with the two companies said the deal made strategic sense for Nokia as it would help strengthen its core business following the handset sale. Alcatel is also relatively strong in North America, a region where Nokia has only begun to make headway after recent deals with Sprint.

A full bid by Nokia for Alcatel has been mooted by analysts in the past, but one person cautioned that such an offer would be complicated by politics given the French government's reluctance to sell key national businesses.

Nokia is aiming to become the world's mobile equipment specialist, while rivals including Ericsson are branching out into other areas such as media services.

So far the Finnish company's gamble on telecoms equipment is paying off. For the third quarter of last year it reported its first year-on-year sales increase in more than three years.

The discussions with Alcatel come amid reports that Nokia is also in talks to sell its Here mapping unit, which would further increase its focus on telecoms equipment.

Talks of a deal also highlight a resurgence in mergers and acquisitions activity in Europe over recent weeks after a slower start to the year.

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