Nokia’s chairman Risto Siilasmaa (left) and chief executive Rajeev Suri addressing a press conference at the Nokia head offices in Espoo, Finland, yesterday. Suri reiterated his hope that jobs will be preserved in the long-term in Finland and France following Nokia’s Alcatel buyout.
Bloomberg/Stockholm
Nokia shares gained on news it struck a $16.6bn deal to buy French rival Alcatel-Lucent. But through the eyes of a credit analyst, the picture is far from rosy.
Nokia’s plan to buy Alcatel with stock will create the world’s biggest maker of equipment for mobile-phone networks. It’s also the largest merger in Finnish history and the mammoth task of combining the two companies is starting to make some bond analysts uncomfortable.
Turning around Alcatel, which has struggled to thrive since its 2006 merger with Lucent Technologies, may take much longer than Nokia expects, said Matthias Hellstern, managing director at Moody’s Investors Service in Frankfurt.
“I’m a credit analyst, so I look for risk rather than opportunities,” he said by phone. “We’ve waited to see Alcatel deliver on its promises for the last five or six years, so we’re more on the cautious side as to whether this is really going to work.”
Moody’s rates Nokia Ba2, with a positive outlook. That’s two levels into junk territory. Standard & Poor’s has Nokia at an equivalent rating of BB. Nokia said on Wednesday, when it announced the deal, that it still targets becoming an investment-grade company in the long term.
Nokia’s shares slumped as much as 2.8% and were down 2.1% to €7.225 at 10:26am in Helsinki trading, giving the network maker a market value of €26.6bn ($28.3bn).
“The biggest question mark here is that Alcatel has for the last seven or eight years not been able to turn their business around,” Hellstern said. “Why should it happen now? Plus, you have integration — a Finnish/German company taking over a French/US company. This might provide some challenges, to be honest. If you assume the issues can be solved, then it’s a good move.”
Rajeev Suri, who will become chief executive officer of the combined Nokia group, says the two companies have “hugely complementary technologies.” He also underlined the merged group’s “strong presence in every part of the world.”
But the question for Moody’s is whether the French firm is beyond reviving. Created in the merger of Alcatel with US-based Lucent, which both had roots in the telecommunications industry of the late 19th century, the company accumulated billions of euros in losses, weakened by Asian competition and slower spending on network equipment by mobile carriers during the financial crisis.
Elina Kalatie, a credit analyst at Nordea Bank AB in Helsinki, says Nokia’s decision to take on Alcatel will delay efforts to regain an investment-grade rating, which the company last had three years ago.
“These kinds of big transactions always include a lot of risks and uncertainties, especially when it comes to achieving synergies and the time-frame of those,” Kalatie said by phone. She said she “wouldn’t be surprised” if Nokia misses the 2019 goal it’s set itself to achieve synergies on the deal.
The cost of insuring Alcatel-Lucent’s debt dropped below that of Nokia for the first time. Credit-default swaps on Alcatel fell 12 basis points to 99 basis points, the lowest since June 2007, according to data compiled by Bloomberg. Swaps on Nokia declined one basis point to 111 basis points. Contracts on Alcatel were more than 300 basis points higher than those on Nokia in October.
Nokia says the decision to preserve its cash will help it achieve its investment-grade goal. The combined company targets about €200mn in lower interest costs by 2017. Its combined net cash position at the end of last year would have been €7.4bn, assuming the conversion of the two companies’ convertible bonds. Nokia had €2.69bn in debt at the end of 2014, according to its website.
Hellstern at Moody’s says there’s “no doubt” Nokia has enough cash to get it through the takeover. And the company’s goal of preserving its cash “proves they have the desire to improve their credit profile.” Nokia’s strategic review of its maps unit, HERE, may also provide “additional funds to restructure the business,” he said.
“If they can turn this around successfully, I think it’s going to be a very good company,” Hellstern said. “If not, it could affect its creditworthiness. We need time to see how this is going to evolve.”