By Sam Schechner
PARIS-- Nokia Corp. is close to buying French rival
Alcatel-Lucent, in a deal aimed at creating a European
telecommunications-equipment behemoth that could spur a new wave of
consolidation.
The two companies said Tuesday that they are in advanced talks
over a "full combination" of their businesses in which Nokia would
offer a share exchange for control of Alcatel-Lucent. The
deal--while not yet sealed--is expected be announced as early as
this week, according to people familiar with the matter.
The Finnish-French tie-up would create a firm with more than
100,000 employees and nearly EUR26 billion ($27.7 billion) in
revenue, rivaling Sweden's Ericsson, the market leader. The deal
would also arm the two companies with more research firepower and a
broader technological arsenal in their fight against China's Huawei
Technologies Co., the No. 2 company whose fast expansion has
rattled politicians in the U.S. and Europe.
"It's a big champion that could compete with Huawei and Chinese
champions," said French Economy Minister Emmanuel Macron after a
meeting with the chief executives of both companies.
The talks come as revolutions in networking are disrupting a
telecom-equipment business that has already suffered the whiplash
of the Internet and brutal price wars when Huawei and Chinese firm
ZTE Corp. burst onto the international scene with low-cost cellular
antennae more than a decade ago.
This time around, industry executives expect a new set of
communication technologies to more closely knit together many types
of network gear, sometimes replacing specialized telecom equipment
with software running on inexpensive computers.
That development could open traditional players to new
competitors, but also give an edge to firms that already have a
broad portfolios and deep client lists, like Huawei and Ericsson.
Smaller Internet routing players like Juniper Networks Inc. could
become acquisition targets.
"What you have is the convergence of networking technologies,"
said Pierre Ferragu, an analyst at Sanford C. Bernstein. "If this
deal works, we could see a new round of consolidation."
In the intervening years, Huawei has roughly tripled the revenue
of its business selling gear to telecommunications firms, despite
being essentially blocked out of the U.S. telecom-equipment market
because of government concerns that the company has ties to the
Chinese military--allegations Huawei denies.
Nokia had roughly 17% market share in wireless networks globally
in 2014, behind 30% for Ericsson and 20% for Huawei, according to
Infonetics, a market-research firm. Alcatel had a 10% share, and
was surpassed last year by ZTE, which now has 11% globally,
Infonetics said.
Huawei has directed particular effort at winning market share in
Europe, undercutting homegrown firms like Alcatel-Lucent. It was
the first, for instance, to make wireless transmitters that
included older 2G and 3G signals along with the capacity to add 4G
in the same box--helping it win contracts from telecommunications
firms in France and other countries.
For France, a deal would end the independence of an industrial
icon that helped develop the country's bullet trains, and was
decades ago the second-largest telecom-equipment maker in the
world, behind the old AT&T.
Successive French governments have sought to nurse domestic
industrial champions capable of competing in the global arena,
often stepping in to keep foreign buyers at bay. Earlier this
month, the French government ordered partially state-owned telecoms
operator Orange SA to find a European owner for its video streaming
unit Dailymotion, even after it was in advanced talks with a Hong
Kong investor. Days later, Orange said it had found an interested
buyer in Vivendi SA, the French media conglomerate.
But France is increasingly straining to maintain French control
over its roster of champions. In the past year, General Electric
Co. has bought the energy assets of Alstom SA. Holcim Ltd. is in
the process of buying French cement giant Lafarge SA.
Constrained by European Union rules limiting state aid and its
own beleaguered finances, the French government has little leeway
to block foreign bidders while supporting national
companies--making transcontinental mergers an attractive
alternative.
The possible French-Finnish tie-up would join two companies that
are only recently emerging from woes that stemmed from a troubled
wave of consolidation nearly a decade ago.
Nokia's telecommunications-equipment unit struggled for years in
what was an awkward joint venture with Siemens AG, forcing a brutal
round of staff cuts and restructuring to return to profit. Nokia
bought Siemens out of the newly profitable company in 2013, after
agreeing to sell its cellphone handset business to Microsoft
Corp.
Alcatel-Lucent, meanwhile, has lurched through repeated
restructuring plans and asset sales as it burned cash. Created in
2006 in the merger of France's Alcatel and the U.S.'s Lucent
Technologies, a spinout from the old AT&T, the company suffered
from trans-Atlantic management spats, and replaced its chief
executive repeatedly. In 2015, it is on track to post positive free
cash flow for the first time.
Those experiences for years chastened executives at both
companies from embarking on a new round of deal making, according
to people at the firms. One problem is that networking companies
must maintain relationships with long-term clients, meaning that it
is harder to discontinue duplicated products and technologies after
a merger.
But cost-cutting at both firms has helped make them more
complementary, rather than overlapping, in their technologies,
analysts say. Alcatel-Lucent CEO Michel Combes has since taking
over in 2013 been slimming down and refocusing the company under
what he described as the "Shift" plan. Alcatel-Lucent has since
sold its office-phone business, its U.S. government-equipment
business and other assets, while cutting staffing.
For Nokia, a deal would be a way to gain market share in the
competitive wireless business against Ericsson in the profitable
U.S. market, where Alcatel-Lucent has historical roots and
long-standing relationships with Verizon Communications Inc. and
AT&T Inc. It would also add Alcatel-Lucent's fast-growing
Internet routing business, which is one of the firm's profit
engines that analysts are counting on for future growth. Nokia's
equipment business has since its restructuring focused solely on
wireless networking.
Alcatel-Lucent has also been planning a public offering of a
minority stake in its submarine-networking division, which is a
leader in laying telecommunications cables beneath oceans. It
remains unclear if that IPO, slated for the second half of the
year, will continue if a combination of Nokia and Alcatel is
agreed. French officials have said the unit is a strategic asset
for the country's intelligence services.
Shayndi Raice contributed to this article.
Write to Sam Schechner at sam.schechner@wsj.com
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