By Jussi Rosendahl and Leila Abboud
HELSINKI/PARIS (Reuters) - Nokia Oyj is in talks to buy smaller telecom equipment maker Alcatel-Lucent, a deal that would combine the industry's two weakest players but could pose challenges in cutting costs and overcoming political opposition.
In a joint announcement, the Finnish and French companies said they were in "advanced discussions" on a "full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent." The two, which have been seen as a possible combination for the last several years, cautioned that the discussions could still fall apart.
The pair are a good fit in terms of products and geographies, and bulking up would help them cut costs as they try to catch up with leaders Sweden's Ericsson and China's Huawei [HWT.UL]. Nokia would expand its presence in the key United States market where Alcatel-Lucent is a major supplier to operators AT&T and Verizon.
But the track record of mergers in the industry is spotty, in part because of the difficulties of cutting costs in a R&D intensive business where companies cannot simply drop products that global telecom operators rely on.
The last round, which gave birth to Alcatel-Lucent and combined Nokia's networks business with Siemens about a decade ago, saw both firms destroy value and lose market share as rivals went on the attack while they were busy integrating the businesses.
Analysts and investors also flagged potential opposition from the French government, which has said in the past it sees the communications industry as strategic, and is sensitive about the job cuts that often go with cost-saving takeover deals. The French Economy Ministry had no immediate comment.
Alcatel has around 6,000 employees in France out of a total of 52,000 worldwide. Nokia has almost 62,000 employees.
Shares in Alcatel, a group worth about 11 billion euros based on Monday's closing share price, rose 14 percent on Tuesday morning. Shares in Nokia, worth about 29 billion euros before Tuesday's announcement, dropped 6 percent.
The statement came in reaction to media reports that the two had revived tie-up talks that have been on and off for years in an industry that is seen by investors and sector executives as in need of further consolidation.
A year ago, Nokia sold its struggling handset business to Microsoft Corp. This week's media reports were focused on the idea that Nokia may buy Alcatel-Lucent's mobile networks arm, which would be a simpler deal to carry out than a full combination but would leave the French firm much smaller.
Clairinvest fund manager Ion-Marc Valahu expressed scepticism over the merits of the proposed deal.
"They could come up with some cost cuts, but just because you combine one weak player with another weak player does not necessarily mean that you will end up with a stronger player."
The combined company would have sales of around 26 billion euros, compared with 24.4 billion for Ericsson last year and 37.44 billion for Huawei, which also sells handsets so is not an exact comparison.
"A merger would mean major risks for Nokia on future costs, as they also have to negotiate with the French government," said Mikael Rautanen, analyst at Inderes Equity Research, who has a buy on Nokia and does not cover Alcatel-Lucent.
"An acquisition of Alcatel's wireless division would be much easier. But the deal would be an excellent getaway for Alcatel-Lucent from its difficulties."
A counterbid for Alcatel-Lucent is seen by analysts as unlikely since Ericsson would run into antitrust problems by bulking up further, and Huawei would face strong political opposition in France and the United States where Alcatel-Lucent is a major supplier to operators AT&T and Verizon.
($1 = 0.9489 euros)
(Additional reporting by Sven Nordenstam in Helsinki, Andrew Callus in Paris and Sudip Kar-Gupta in London; Editing by Leigh Thomas, Keith Weir and Sophie Walker)
