Barclays Sees Combined Nokia-Alcatel As A 'Stronger Force' In Global Networking; Upgrades To Overweight

In a report published Wednesday, Barclays analyst Andrew Gardiner (based in London, England) upgraded shares of Nokia Corporation (NYSE: NOK) to Overweight from Equal-weight with a price target raised to 8.75 euro (approximately $9.38) from a previous 6.70 euro as the combined Nokia and Alcatel Lucent SA (NYSE: ALU) will act as a "stronger force" within the global networking space.

According to Gardiner, the combined entity will deliver top and bottom line growth and increase shareholder return. The analyst was previously bullish on Alcatel-Lucent as a standalone company for its growth prospects in IP routing and transport. On the other hand, he had a "more cautious" stance on Nokia fearing patent revenue would not grow quickly enough to offset declines in Networks revenue and profitability.

The analyst continued that the combined company should see growth in IP routing/transport, synergies in wireless/corporate and an improved financial structure. In fact, the company could realize material accretion of around 50 percent in 2017.

"While M&A in telecom equipment has historically been fraught with difficulty, we think things are different this time and find the risks manageable," Gardiner wrote. "By buying all of Alcatel, Nokia gains access to a larger and faster growing total addressable market (TAM) with IP routing and transport."

Gardiner noted that many investors are "frustrated" that an all-equity deal results in share dilution, and this is a legitimate concern as initial dilution is "significant" due to Alcatel's convertible bonds. However, the analyst added that this is temporary as Nokia has a strong track record of returning excess cash to shareholders with a current three percent dividend yield and a two percent share buyback.

Bottom line, the analyst expects "limited" antitrust issues and the integration risk is "manageable."