Nokia acquires Infinera to increase its market share in AI

With Nokia's $2.3 billion (Rs 19.17 thousand crore) acquisition of US-based Infinera, Nokia is now well-positioned to benefit from significant investments in data centres spurred by the expansion of artificial intelligence. With a 20% market share, Nokia would become the second-largest optical networking provider after Huawei as a result of this approach. Many telecom firms have started branching out into emerging industries like artificial intelligence.

The transaction represents a premium of 28% to Infinera’s share price at the close of 26 June 2024 and a 37% premium to the trailing 180-day volume weighted average price (VWAP). At least 70% of the consideration will be paid in cash and Infinera’s shareholders can elect to receive up to 30% of the aggregate consideration in the form of Nokia ADSs. Nokia’s Board of Directors has committed to increase and accelerate Nokia’s share buyback program to offset the dilution from the deal.

Nokia and Infinera see a significant opportunity in merging to improve scale and profitability, enabling the combined business to accelerate the development of new products and solutions to benefit customers. The transaction aligns strongly with Nokia’s strategy, as it is expected to strengthen the company’s technology leadership in optical and increase exposure to webscale customers, the fastest growing segment of the market.

Nokia believes the transaction has compelling financial and strategic merit. The combination with Infinera is projected to accelerate Nokia’s journey to a double-digit operating margin in its Optical Networks business. Nokia targets to achieve EUR 200 million of net comparable operating profit synergies by 2027. This transaction along with the recently announced sale of Submarine Networks will create a reshaped Network Infrastructure built on three strong pillars of Fixed Networks, IP Networks and Optical Networks. Nokia targets mid-single digit organic growth for the overall Network Infrastructure business and to improve its operating margin to mid-to-high teens level.

The transaction is expected to be accretive to Nokia’s comparable EPS in the first year post close and to deliver over 10% comparable EPS accretion by 2027, with a return on invested capital (RoIC) comfortably above Nokia’s weighted average cost of capital (WACC).         

Pekka Lundmark, President and CEO of Nokia, said, “In 2021 we increased our organic investment in Optical Networks with a view to improving our competitiveness. That decision has paid off and has delivered improved customer recognition, strong sales growth and increased profitability. We believe now is the right time to take a compelling inorganic step to further expand Nokia’s scale in optical networks. The combined businesses have a strong strategic fit given their highly complementary customer, geographic and technology profiles. With the opportunity to deliver over 10% comparable EPS accretion, we believe this will create significant value for shareholders.”

David Heard, CEO of Infinera, said, “We are really excited about the value this combination will bring to our global customers. We believe Nokia is an excellent partner and together we will have greater scale and deeper resources to set the pace of innovation and address rapidly changing customer needs at a time when optics are more important than ever – across telecom networks, inter-data center applications, and now inside the data center. This combination will further leverage our vertically integrated optical semiconductor technologies. Furthermore, our stakeholders will have the opportunity to participate in the upside of a global leader in optical networking solutions.”

Under the terms of the definitive agreement, Nokia is acquiring Infinera for $6.65 per share, which equates to an enterprise value of $2.3 billion. For each Infinera share, Infinera shareholders will be able to elect to receive either: 1) $6.65 cash, 2) 1.7896 Nokia shares, or 3) a combination of $4.66 in cash and 0.5355 Nokia shares for each Infinera share. All Nokia shares will be issued in the form of American Depositary Shares. The definitive agreement includes a proration mechanism so that the Nokia shares issued in the transaction do not exceed an amount equal to approximately 30% of the aggregate consideration that may be paid to Infinera shareholders.