Nokia Oyj (NOK1V)’s sale of its handset business is clearing the way for a 2 billion euro ($2.7 billion) takeover of Alcatel-Lucent SA (ALU)’s wireless network-equipment unit.

With Nokia receiving 5.44 billion euros next year for selling its handset unit to Microsoft Corp., the company’s cash is set to exceed 14 billion euros, its highest balance on record and the eighth-most among non-finance companies in Europe, according to data compiled by Bloomberg. At the same time, Alcatel-Lucent Chief Executive Officer Michel Combes is accelerating plans to scale down, including selling assets, to help the unprofitable French company survive.

“This deal makes complete sense,” Sami Sarkamies, a Helsinki-based analyst at Nordea Bank AB, said in a phone interview. “Nokia will have the financial flexibility to do this kind of deal and Alcatel needs to slim down. There is a relatively high likelihood of this deal happening.”

Nokia has evaluated options including a combination with Alcatel-Lucent’s mobile-phone networks business, a person with knowledge of the matter said last month. An acquisition would open the U.S. market to Nokia, helping the Finnish company shrink the gap with market leader Ericsson AB. (ERICB) With analysts’ estimates for the cost of the wireless business ranging from 1 billion to 2 billion euros, Pohjola Bank said Nokia will also be able to resume paying a dividend of as much as 40 cents a share.

Microsoft Deal

Doug Dawson, a spokesman for Espoo, Finland-based Nokia, and Simon Poulter, a spokesman for Paris-based Alcatel-Lucent, declined to comment on the prospects for consolidation.

“Alcatel-Lucent’s focus is on executing the Shift Plan as the means of managing our own destiny,” Poulter said, citing the company’s turnaround plan.

Nokia’s sale of the mobile-phone business to Microsoft was announced Sept. 3 and is expected to be completed in the first quarter, handing the company cash of 3.79 billion euros for the phone division plus 1.65 billion euros for patents.

A month earlier, Nokia took full control from Siemens AG of the Nokia Solutions and Networks business, which generates 13 billion euros a year and will account for more than 90 percent of sales after Nokia exits handset making. Buying Alcatel-Lucent’s wireless segment would add another 3.4 billion euros in annual sales, excluding services and software.

The new entity would command 32 percent of the world’s wireless infrastructure market, based on data from Barclays Plc, overtaking Chinese competitor Huawei Technologies Co.’s 22 percent share and nearing market leader Ericsson’s 36 percent.

‘Huge Opportunity’

Nokia, Ericsson and Alcatel-Lucent are vying for contracts from wireless operators as they upgrade networks using fourth-generation technology to cope with data-hungry tablets and smartphones. The U.S. presents an opening as Shenzhen-based Huawei has been barred there on security concerns.

“It’s a huge opportunity,” Janardan Menon, a London-based analyst at Liberum Capital Ltd., said in a phone interview. “The U.S. is the largest market in the world and Nokia doesn’t have any share there outside of T-Mobile. An acquisition of Alcatel-Lucent’s wireless business will give Nokia a much-needed footprint.”

U.S. phone companies Verizon Communications Inc. (VZ), AT&T Inc. and Sprint Communications Inc. together accounted for 35 percent of Alcatel-Lucent’s revenue last year, while making up less than 4 percent of Nokia’s, according to data compiled by Bloomberg.

Turnaround Plan

Alcatel-Lucent’s Combes, who took over as CEO in April, is trying to staunch a drain on cash as the first step toward renegotiating debt to get back the company’s patents that were previously pledged as loan collateral. To do that, Combes is speeding up a turnaround effort, including a tighter focus on more lucrative businesses.

“We are going to focus on the areas where we can be one of the top three players in the world,” Combes said this week during a hearing at the French National Assembly. “Otherwise, it’s not worth it.”

Alcatel-Lucent’s wireless assets may sell for 1 billion to 2 billion euros, according to the range of estimates from analysts at Nordea, Credit Suisse AG, Barclays and Kepler Cheuvreux France.

No talks were under way between Alcatel-Lucent and Nokia as of Sept. 26, Bloomberg News reported at the time, citing people with knowledge of the matter.

Junk Rating

Alcatel-Lucent fell 0.4 percent to 2.71 euros at 9:18 a.m. in Paris. Nokia slipped 0.7 percent to 5.24 euros in Helsinki.

Nokia had 9.1 billion euros of cash and equivalents as of June 30. Adding the 5.44 billion euros in expected proceeds from the sale to Microsoft would potentially push the company’s cash pile to 14.5 billion euros. Nokia, which has a junk credit rating, has 5.4 billion euros of total debt.

On a Sept. 3 conference call, Timo Ihamuotila, Nokia’s chief financial officer and interim president, said that if the Microsoft and Siemens transactions had closed before the end of the second quarter, the company would have had gross cash of 14.9 billion euros.

Nokia, which skipped a dividend payment this year for the first time in at least 143 years, will evaluate its three remaining units and then return excess cash to shareholders, he said.

“Nokia will certainly have the firepower to do both M&A and resume its dividend,” Hannu Rauhala, an analyst at Pohjola Bank in Helsinki, said in a phone interview. “If Nokia pays around 2 billion euros for the Alcatel wireless assets and keeps a healthy balance sheet to keep carriers’ confidence, they would still have enough cash to pay a dividend of up to 40 cents. The deal would be a smart move for Nokia and its investors.”

Deal Setbacks

A purchase of Alcatel-Lucent’s wireless assets would entail at least 500 million euros of restructuring expenses, according to analysts’ estimates at Nordea, Credit Suisse and Barclays.

The companies already have a track record of difficult deals. Nokia’s networks business was formed through a 2007 joint venture with Siemens, and led to 9,000 job cuts in the first year alone. The 2006 combination of Alcatel SA and Lucent Technologies resulted in more than $10 billion in cumulated losses and a reduction of about a third of the workforce.

France, which owns 3.6 percent of Alcatel-Lucent, has already shown it is willing to intervene in the company’s strategy. President Francois Hollande’s Socialist government last week threatened to block Alcatel-Lucent’s plans for firings and in February considered buying a bigger stake in the company to protect its patents.

Samsung, Ericsson

Nokia may be pressed to act before Ericsson or Samsung Electronics Co. (005930) considers bidding, said Sarkamies of Nordea. While Barclays said in an Oct. 14 note that Ericsson may face regulatory hurdles in the U.S., Sarkamies said Samsung may view Alcatel-Lucent’s assets as a chance to become a player in wireless network equipment after overtaking Apple Inc. as the world’s largest smartphone vendor.

Samsung is not considering an acquisition of Alcatel-Lucent’s assets, a representative for the South Korean company said in an e-mailed statement. Ericsson’s focus continues to be on organic growth, Ola Rembe, a spokesman for the Stockholm-based company, said by e-mail.

“Alcatel-Lucent’s wireless business would be a good fit for Nokia and a deal definitely makes sense on paper, though execution would likely be tricky,” Sebastien Sztabowicz, a Paris-based analyst at Kepler Cheuvreux, said by phone.

(Source: Bloomberg)