If you’re still wondering why Nokia (NOK) would pay $17.8 billion for Alcatel-Lucent (ALU), the latest deal that includes China Mobile (CHL) should leave little doubt. The deal is huge, and the best news of all is that the big deals should keep on coming. This bodes well for the long-term performance of Nokia stock.
Last week, Nokia signed a very large deal with China Mobile; the terms were undisclosed. Nokia will provide TDD-LTE-A technology to a carrier who just installed its one millionth TDD-LTE-A base station.
The fact that China Mobile could still triple the size of its 4G LTE network suggests that this partnership will be very lucrative for Nokia.
China Mobile has nearly 200 million 4G LTE subscribers, and while very large, it hardly compares to the 820 million total subscribers on China Mobile’s network, most of whom are on legacy 2G and 3G networks.
The fact that Nokia will help China Mobile transition so many subscribers to 4G is great for the carrier, and would not have been possible without the ALU partnership.
What Made the NOK Deal Possible?
Nokia and Alcatel-Lucent are two very different telecom equipment providers. The former sells base stations and towers, and deals with the actual construction of 2G, 3G, and 4G networks. Meanwhile, ALU sells optical equipment, IP routers and switches, and is a leader in services that make mobile networks operate smoothly.
Additionally, NOK is dominant in Europe and various parts of Asia, whereas ALU’s dominance lies in China and North America. Notably, NOK is also relevant in North America, as the merger created partnerships with all four U.S. nationwide carriers.
Nevertheless, the opportunity to build a larger presence in China is the real gem for NOK, much like the opportunity for ALU to penetrate India. These opportunities are much more likely due to each company’s respective presence, as NOK will get access to the Chinese customers that ALU has established relationships with. Further, ALU can offer those customers complete network services from the ground up, thanks to its merger with NOK.
With that said, NOK is wasting no time penetrating China, not with so many big deals up for grabs. ALU has a joint venture with China Huaxin where it owns 50% plus one share. It is called Alcatel-Lucent Shanghai Bell, and the venture created $5 billion in revenue for ALU last year.
Looking ahead, that revenue is only going to rise, as ALU signed new deals with the top three Chinese carriers (including China Mobile) in the final months of last year for use of its 7950 XRS routing products to improve mobile and broadband networks. Meanwhile, NOK created $1.6 billion in revenue, lacking the big contracts with top service providers.
All that changed when NOK grabbed the TDD-LTE-A deal with China Mobile, a likely result of the connection to ALU and its recent name change of Alcatel-Lucent Shanghai Bell to Nokia Shanghai Bell, thereby giving it more brand appeal in the region.
Expect More Partnerships for NOK and ALU
Investors should expect more contract wins, as NOK tries to earn similar deals with other large telecom customers of ALU in the months ahead. This will be an interesting catalyst to monitor, both now and when the acquisition is complete early next year.
NOK is already winning deals with ALU customers in China, and I suspect that ALU will do the same with NOK’s customers in India. Remember, India is expected to be the fastest growing smartphone market of the next 10 years, and Nokia has a big lead in the region after signing 34 Indian deals last year alone.
Combining these new business opportunities in key growth markets with the $1 billion-plus in operating cost synergies and $250 million in interest expenses that NOK expects to achieve following the ALU merger, it is clear that the combined entity of Alcatel-Lucent and Nokia stock is going to create significant shareholder value that neither company could have achieved alone.
As of this writing, Brian Nichols owns shares of Alcatel-Lucent.