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Alcatel, the French telecoms equipment provider, unveiled plans to buy Nortel’s UMTS cellphone network unit for $320m on Friday, aiming to become the world’s third-largest supplier of 3G wireless technology.
The deal underlines Alcatel’s ambition to gain scale in a fast-growing market, building on its planned merger with US rival Lucent, which must be approved by a two-thirds majority of shareholders on Thursday. Marc Rouanne, Alcatel’s head of mobile communications, told a conference call the transaction would also strengthen the group’s position in mature Western European mobile markets – previously a weakness – and increase its R&D capacity.
Under the non-binding agreement, Alcatel would buy the UMTS radio access business with related assets including its product portfolio, patents and contracts to serve an additional 14 customers. The sale of Nortel’s 3G unit will enable the Canadian telecommunications equipment maker to simplify its business and focus on next generation 4G wireless broadband and other high-growth businesses.
“Nortel is sharpening its focus on the markets in which we intend to lead,” said Mike Zafirovski, who was brought in as Nortel’s chief executive to rejuvenate the company after an accounting scandal. “Our UMTS access business lacks the scale and momentum needed to become profitable.”
Nortel’s combined GSM and UMTS businesses generated about $2.8bn in revenues in 2005, when it recorded a pre-tax loss of $4m.
A Lucent profit warning in July triggered a slide in both its shares and those of Alcatel and cut the value of their merger by about 20 per cent. Since then, speculation has grown that Alcatel’s shareholders might seek a renegotiation of the share exchange rate on which the offer is based. Serge Tchuruk, Alcatel’s chief executive, this week answered criticisms from Proxinvest, a French investor advisor, which had argued shareholders should reject the merger.
“It is not possible to change the terms of the merger,” he said in an interview with Les Echos, the FT’s sister paper, calling it “absurd to extrapolate the last quarter’s results over 10 years” and defending corporate governance plans that would allow the 68-year-old to remain in post for a relatively long time.
Institutional Investor Services, the US shareholder advisory firm, recommended that investors approve the $10.4bn acquisition, arguing that the expected synergies and increase in scale offset a “degree of scepticism”.
However, Clara Van der Elst, analyst at Standard & Poor’s, said the chance of shareholders rejecting the deal at next week’s meeting had risen to “something just short of 50:50”.
The transaction underscores the strategy adopted by the former Motorola senior executive, who has set his sights on refocusing the company on growth markets and rebuilding its reputation as an engineering powerhouse and technology leader.
Nortel has identified three core business areas for growth: next-generation mobile systems, so-called “enterprise transformation”, and services and applications. Much like its partnership with Microsoft announced in July, the sale of the 3G business to Alcatel is seen as another key step in this strategic shift.
“With next-generation mobility, we see an opportunity to change the game by applying our networking expertise and technology innovation to significantly alter the economic paradigm of mobility solutions in the future,” said Mr Zafirovski who also emphasized that Nortel remains committed to the mobile telecommunications infrastructure business and to the development of 4G systems based on emerging technologies.
Nortel currently has about 10 per cent of the UMTS 3G market, while Alcatel has about 4 per cent and Lucent Technologies, which is mainly focused on the rival CDMA technology developed by Qualcomm has another 2 per cent. Market leaders Nokia and Ericsson have in excess of 30 per cent market share each.