After Siemens (SI) sold their stake of Nokia Siemens Networks at a more than reasonable price, it was a key indicator of changes coming at Nokia (NOK). This is when I started building my long position. Post Microsoft (MSFT) acquisition, Nokia's greatest chunk of revenue will be derived from Nokia Solutions and Networks. Recently, articles have begun to hit related to a possible deal with Alcatel-Lucent (ALU), which would allow Nokia to better compete with industry giant Ericsson (ERIC).
Nokia has got plenty of clean up to finnish (get it?) in its own house, including closing the Microsoft deal. Nokia has completed their NSN restructuring, which leaves the company in a transitioning state.
Alcatel-Lucent also announced a reorganizing and restructuring plan in July 2012 (Nokia's kicked off in November 2011). Restructuring includes dropping markets, deals, employees and more to a total savings of EUR 1.25 billion. Nokia spent over EUR 2 billion in 2011 and 2012 on their restructuring program.
Programs from both companies are targeted to be complete by the end of 2013. As of today, Nokia's restructuring efforts seem a bit more complete than Alcatel-Lucent's.
Sooner Rather Than Later?
Chatter on a potential deal has picked up recently. A quick Google search will show headlines from major news sources. Interestingly, Nokia levered a EUR 1.5 billion convertible option from the Microsoft deal. But, this cash should have been used to pay off EUR 1.2 billion in bank financing from the Siemens JV acquisition.
Alcatel-Lucent just announced 10,000 job cuts, but when they launched their restructuring program a workforce reduction of 5,500 was expected globally. The French government has responded negatively to the announced job cuts.
The Microsoft deal will provide EUR 5.4 billion at close, plus more over time, but it isn't expected to close until Q1 2014. Following, Nokia should actually be reporting earnings per share, a first in quite some time. Nokia would pay the convertibles back with cash from the Microsoft transaction at close, and the company stated they expect to net EUR 3.2 billion from the deal. Nokia closed Q2 2013 with net cash of EUR 4.1 billion.
It seems logical that if Nokia were to buy some or all of Alcatel-Lucent, it would be more than possible, but I can't see the deal closing until Q2 2014.
Is Another Deal On The Table?
A Barron's article details Nokia grabbing the wireless business unit from Alcatel-Lucent. Looking at the time line, fundamentals, and history of both NSN and ALU, I would be a little put off if Nokia rushed off and bought all of Alcatel-Lucent today. Moreover, I'm not sure they need to rush to grab the wireless business right away. Perhaps, maybe I'm missing something in an important potential contract win, or something else.
Based on the cash position I expect Nokia to have in Q1, Q2 2014, I would think this is the time to make the deal, and at the absolute earliest, near the end of Q4 2013.
Either way, the only thing I really don't think will happen is Nokia will make an offer to buy all of Alcatel-Lucent, or spend a big chunk of cash before the end of the year. Is Barron's right, or is there another possible deal on the table? And, if there is another deal, who wins in the short and long term?
Consistent with my previous articles, I think Nokia is a buy, and at the current price at the time of writing, a strong buy. If an ALU deal is right around the corner, Nokia shareholders might be wise to hedge the short-term risk on a long ALU position. I have little interest in owning ALU as it has made a big move recently, and looks like a Nokia from two quarters ago without a handset business unit to sell.
Have you been following the Nokia Alcatel-Lucent story? Your comments, please.