AT&T's $14 billion contract snub could lead to Nokia breaking up, analyst says

By Louis Goss

Nokia could be forced to break-up in the wake of AT&T's decision to award a $14 billion contract to its Swedish rival Ericsson to modernize its U.S. telecoms network, an analyst warns.

Shares in Nokia (FI:NOKIA) (NOK) plunged as much as 10% in Helsinki trade on Tuesday in the wake of AT&T's (T) decision to pick Ericsson to build out its new U.S. open radio access network.

An analysts has warned the blow to Nokia could even see the firm forced to split off parts of its business that might be better run by local players who are better suited to operating in the huge U.S market amid concerns interpersonal relations scuppered Nokia's bid.

"We believe the developments in the US could trigger a break-up of Nokia or acquisition of at least Mobile Networks by a US industrial buyer which would be better equipped to charm the local customers," Danske Bank analyst Sami Sarkamies said.

Sarkamies explained that interpersonal relations between teams at Nokia and AT&T likely played a part in the U.S. firm's decision to pick Ericsson over its Finnish counterpart, as he argued a shakeup of the firm's board is now inevitable.

"We don't think the decision came down to nitty-gritty product features such as fan-based cooling, rather it has been more about top-level relationships, credibility and corporate image in the eyes of the customer," Sarkamies said.

Nokia in turn said AT&T's award will delay its push to achieve double digit operating margins in its mobile networks business by two years, as it noted sales to the U.S. telecoms giant have accounted for 5% to 8% of the division's revenues in 2023 to date.

The Espoo, Finland-based firm said the impacts of AT&T's decision will be partially offset by cost-cutting measures announced in October, which saw Nokia vow to cut 9,000 to 14,000 of its 86,000 global employees by 2026.

Nokia's share price fell 9% on Tuesday having fallen 42% over the previous 12 months. Shares in Ericsson (SE:ERIC.B) (ERIC) increased 5% on Tuesday having dropped 14% over the past year.

AT&T's push towards use of open source infrastructure will, in turn, boost competition in the sector, in allowing access to companies that lack their own proprietary technology. AT&T now plans to run 70% of its wireless network traffic via open source platforms by 2026.

The switch to open source technology will in turn see Nokia face even greater competition from rival suppliers in the lucrative U.S. market, which is currently the most valuable telecoms market in the world. AT&T is the largest spender in the U.S. market.

Citi analyst Andrew Gardiner said the AT&T contract will now give Ericsson a significant first mover advantage over its rivals, in seeing the Swedish firm become "the first truly global vendor to deploy open RAN with a major operator into an existing network."

"Nokia had been the primary share gainer within the RAN market for the past two years, following the decline after it lost significant share at Verizon (VZ) in 2019. The loss of share at a second North American customer, particularly given Nokia's legacy in that market, is a considerable blow," Gardiner added.

Nokia had already scheduled a progress upgrade, for Dec. 12.

"This is now of even more importance given the loss of a major customer within mobile," he said.

Societe Generale analyst Alek Peterc said: "Net-net, this is a very significant win for Ericsson, and a major loss for Nokia. Expect Nokia and Ericsson shares extend the sell-off (Nokia) / re-rating (Ericsson) that started yesterday as the news of this development was emerging."

"We understand that the operator took this decision for specific reasons that are not related to the quality (or lack thereof) of Nokia's products and solutions. That said, after the loss of 5G footprint at Verizon to Samsung, this is yet another significant setback for Nokia in the crucial (highest-margin) U.S. market," Peterc added.

A Nokia spokesperson told MarketWatch the company does not comment on speculation.

-Louis Goss

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12-05-23 0959ET

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