LONDON--A marriage between Finland's Nokia Corp. and French
rival Alcatel-Lucent SA could create the world's largest
telecommunications-equipment giant, at least by revenue, while
shrinking the number of global telecoms suppliers and strengthening
an important vendor for U.S. carriers.
Still, analysts said that despite a highly concentrated market
for telecom gear, suppliers haven't been able to flex muscle over
pricing-power lately. And a combined Nokia and Alcatel could
provide a rival about the same size as industry leaders Ericsson
and Huawei Technologies Co., and actually pressure prices, as all
three compete for each other's customers.
"It is an intensely competitive sector," said Rick Mattila, an
analyst at Mitsubishi UFJ Group. Huawei, a relative newcomer, has
been pressuring prices in recent years. In addition to the
industry's "Big Four," a handful of relatively small Asian gear
makers also compete for customers.
On Tuesday, Nokia said it was in advanced talks to buy Alcatel
in a deal that, if it goes through, would create a European
equipment giant with a combined market value of $40 billion at
current prices. Combined revenue for the two companies in 2014 was
about $27 billion, edging out rivals Ericsson and Huawei in terms
of sales last year.
A ramped-up Nokia could compete head-on with Ericsson and Huawei
for carrier customers. All three build and sell infrastructure such
as cellphone masts, towers and relay stations at a time when
technological advances and consumer demand for more data on their
smartphones and other devices have triggered massive investment in
network infrastructure by carriers.
Consolidation could also cut costs of research and development,
which may filter down to the price a merged company could afford to
offer.
"It could be a good thing" for carriers, said Sylvain Fabre, an
analyst at research firm Gartner.
Still, even before the talks were disclosed, carrier executives
have worried about having too few suppliers in the market. In the
wireless sector, for instance, Ericsson, Huawei and Nokia already
control 80% of the global market by revenue, according to Bernstein
Securities. Alcatel-Lucent holds another 10% share.
U.S. operators were supportive of the possible combination.
Having fewer vendors would make things easier by streamlining their
technology roadmaps, and give the newly combined company more
financial strength to develop new products, U.S. wireless
executives said.
Big European telecom carriers weren't talking about the merger
talks early on Tuesday. Representatives for Vodafone Group PLC, the
world's second largest carrier by subscribers behind China Telecom
Corp., declined to comment. U.K. fixed-line incumbent BT Group PLC,
which is looking to complete a deal for mobile operator EE, also
declined to comment, as did Orange SA.
A merger would be a way for Nokia to boost its share of the
competitive and profitable U.S. wireless market, where Alcatel
Lucent has roots. The company was formed in 2006 with the merger of
Alcatel and Lucent Technologies, which AT&T Inc. had spun
off.
AT&T and Verizon Communications Inc. together spent more
than $38 billion on capital expenditures in 2014. Ericsson has the
largest share of the U.S. market, at 33%, followed by
Alcatel-Lucent with 27% and Nokia with 20%, according to
Infonetics. At 11% share, Samsung will trail far behind if the
companies reach a deal.
Chinese vendors are effectively barred from the U.S. market,
making it even more attractive for the European vendors. T-Mobile
and Sprint signed agreements with the U.S. government that allow it
to review vendor selections. A 2012 congressional report
recommended U.S. telecom carriers avoid using networking gear from
the China-based Huawei due to alleged national-security risks.
Huawei has denied the allegations.
While Nokia does work for AT&T and Verizon, its primary
footprint is with the U.S.'s two smaller carriers, T-Mobile US Inc.
and Sprint Corp., which both use it for portions of their LTE
wireless networks. AT&T and Verizon rely more heavily on
Ericsson and Alcatel-Lucent.
If a deal is consummated, it will almost certainly go through
review by the Committee on Foreign Investment in the United States,
said Farhad Jalinous, a partner at Kaye Scholer LLP who used to be
part of such reviews. CFIUS scrutinizes and puts conditions on
transactions with national security implications.
Mr. Jalinous said the deal would be subject to the review
because both companies play a major role in the U.S.
telecommunications networks and because Alcatel-Lucent already
operates under certain agreements as a result of its acquisition of
Lucent.
Write to Simon Zekaria at simon.zekaria@wsj.com
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