September 29, 2013 3:55 pm

Telecoms: deaths, births and marriages

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Equipment sector is buzzing with consolidation rumours

It is usually thought seemly to wait for the funeral before discussing the departed’s assets. Still, forward thinking has never been wrong as far as investors are concerned. No surprise, then, that speculation should surround the rump of Nokia – made up of telecoms equipment business NokiaSiemensNetworks, intellectual property assets and cash – weeks before shareholders at the Finnish group even formally consider the sale of Nokia’s core handset division to Microsoft.

Shares of France’s Alcatel-Lucent jumped 6 per cent late last week amid talk about its potential as an NSN marriage partner. At one level, this is nothing new: NSN, the third largest mobile infrastructure supplier after Ericsson and Huawei, has long been in the M&A frame. This is partly due to its modest size – 2012 sales were half Ericsson’s – in a sector where scale economies count.

Still, there are reasons to think that the telecoms equipment environment generally may now be more conducive to dealmaking, although investors still need to weigh specific corporate dynamics. The sector’s big driver is wireless equipment spending, on LTE/4G networks and, increasingly, on enhancements to add data capacity and speed. This shift from network coverage to higher-margin capacity looks set to improve the returns for equipment makers – although NSN, with a more limited US presence, may benefit less than Ericsson and Alcatel from improving the mix there.

At the same time, a number of companies are at a stage where acquisitions might look appealing. Huawei’s mobile market share, which grew quickly between 2008-10, has been flat recently. It may seek growth, as may rival Chinese group ZTE. Alcatel is on a restructuring drive; Samsung has infrastructure supplier aspirations. How quickly this plays out is another matter. But Bloomberg’s European sector index has doubled in a year. That’s lively.

Email the Lex team in confidence at lex@ft.com

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