Shares of Alcatel-Lucent have continued to decline in response to recent weakness in shares of proposed merger partner Nokia.
But overall, analysts remain bullish on the companies’ future with several upgrading their stock ratings in recent weeks.
On April 15, the companies announced they had signed a memorandum of understanding for an all-share transaction. Nokia will offer in France and the United States .55 Nokia share for every Alcatel-Lucent share with a total value of $16.5 billion based on an $8.26 closing share price on April 13.
Since April 22, Nokia’s shares have declined 12% from $7.81 to $6.98 on May 14. Alcatel-Lucent’s shares have dropped 9.2% from $4.12 on April 22 to $3.74 on May 14.
Both Nokia and Alcatel-Lucent have seen a mix of upgrades and downgrades since the announcement, with the downgrades occurring immediately after the announcement and upgrades more recently.
Nokia’s offer to buy France’s Alcatel-Lucent represents further consolidation of the telecom infrastructure market. The joining of these two European network giants appears to have left only three global players: Ericsson, Huawei and the new Nokia to be created by this acquisition. The deal is expected to close as soon as the first half of 2016.
On May 8, UBS analysts issued a research report noting that they believe Nokia “struck a good deal for its shareholders” with Alcatel-Lucent.
“From here, there is much to look forward to as an investor in New Nokia – a likely agreement with Samsung around IPR, a possible sale of HERE, the extraction of the synergies in the new business and the hidden value we have previously flagged in assets such as Nuage Networks/Core IP routing. At the current share price we believe market based repair of margins are not priced into the stock and represent a free option,” they wrote.
The UBS analysts also gave a nod to the merger as a whole saying it was “a positive for the wider industry over time” given the financial health of most infrastructure companies currently, as well as the geographic spread of the companies.
Over time, UBS predicts, structurally higher margins should be expected across the industry due to the consolidation of Nokia and Alcatel-Lucent.
“Q1 should mark the near term trough in wireless spending trends and valuations across the sector are undemanding,” the analysts wrote. “The pricing benefits in a commodity market are likely to take time to emerge given long product cycles, but over time we believe structurally higher margins should be expected across the industry.”
