Citi Downgrades Nokia And Alcatel Amid Challenges Following Acquisition

Citi issued a report on Nokia Corporation (ADR) (NYSE: NOK) and Alcatel Lucent SA (ADR) (NYSE: ALU) after the announcement that Nokia was acquiring Alcatel-Lucent in an all stock deal. Citi downgraded Nokia from Buy to Neutral and maintained a €7.50 price target. Citi also downgraded Alcatel-Lucent and reduced its price target from €5.00 to €4.15.

Analysts Ehud Gelblum, Stanley Kovler and Jeremy David wrote, "We continue to believe Nokia would have been better off acquiring just the Wireless assets but were forced to acquire the entire company possibly leading to what we believe was a low purchase price...We believe the all stock structure (and no collar) creates new risk for Alcatel holders, since it hitches ALU shares to NOK shares."

The analysts believe that a partly cash deal would have been more beneficial to the companies due to the low interest rate environment. The operations of the Alcatel businesses other than Wireless, including IP transport and Fixed Access, may prove to be challenging for Nokia to manage. While the companies have announced a possible €900 million in synergies, this may be a hard target to attain because there is a significant lack of research and development overlap with Nokia and Alcatel.

Overall, Citi believes that the deal creates inherent risks for Alcatel shareholders as it aligns shares of the company with Nokia's price movements. For Nokia, while it may have gotten a discounted price for Alcatel, analysts believe that Nokia will face challenges hitting earnings targets and creating a fundamental strategy as it attempts to manage all of Alcatel's business units.