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The Winners From Washington’s War on Huawei

The attorney general’s pitch for a U.S. takeover of Europe’s 5G equipment makers seems like a long shot, but investors might benefit from Washington’s hawkish stance on Huawei anyway.

Shares in mobile-network equipment providers

Nokia


NOK 4.05%

and

Ericsson,


ERIC 5.41%

from Finland and Sweden, respectively, jumped on Friday morning after Attorney General

William Barr

said in a speech late Thursday that the U.S. should consider taking a “controlling stake” in either or both companies. Mr. Barr is worried that China’s Huawei is starting to build a dominant global position in 5G networks that could one day compromise U.S. security. He wants a strong alternative.

Mr. Barr’s unexpected intervention raises plenty of open questions. Unlike its European peers, the U.S. government has little experience of owning private companies except when they have gone bust, as

General Motors

did in 2009. It seems likely that any proposal for a direct investment would run into political problems with Mr. Barr’s Republican peers, given its socialist flavor.

It is also unclear what control of Nokia or Ericsson would achieve. Mr. Barr said that putting U.S. “market and financial muscle behind one or both of these firms would make it a far more formidable competitor.” But Washington already keeps Huawei out of its telecommunications market, making it effectively a duopoly for the Nordic players. As for financial muscle, neither company is underfunded, with a net cash position at Ericsson and very modest debt at Nokia.

Mr. Barr—who as a former general counsel for

Verizon

is intimate with the industry—said in his speech that China is offering “over $100 billion in incentives to finance customer purchases of its equipment.” Is he suggesting that the U.S. fight back by financing 5G purchases from the Nordic players? That might make a difference, but why would it require the government to own strategic stakes?

Even if a deal doesn’t transpire, investors might be wise to have another look at the stocks. Nokia and Ericsson should eventually see a sales benefit from suspicions about Huawei’s technology.

So far, they haven’t. Rather than purchasing their equipment, telecom providers have simply paused their 5G investments and waited for more clarity on regulation. But now clarity is emerging. Late last month, the U.K. set limits on Huawei’s role in its mobile networks, including a 35% market share cap even in those areas where it is allowed to compete. Companies that run networks, such as the former state monopoly

BT Group

and mobile giant

Vodafone,

have since warned that they will spend hundreds of millions of dollars adapting their networks. Many of those dollars will presumably flow to Ericsson and Nokia.

One form of intervention that might be more palatable to American politicians than direct ownership would be a takeover of Ericsson or Nokia by a U.S. company.

Cisco,

a leader in corporate and Wi-Fi networks, is the most obvious candidate. It already has a sales partnership with Ericsson, a roughly $205 billion market capitalization—more than seven times that of its European ally—and net cash.

Nokia’s shares rose roughly 7% on Friday, compared with 6% for Ericsson. Mr. Barr mentioned the Finnish company first in his speech, but Ericsson might prove an easier target for political reasons. Nokia’s revenue amounts to roughly 10% of Finland’s gross domestic product, and its government owns a 3.8% stake. Sweden’s economy is more than twice as big, and Stockholm doesn’t have a record of intervening in foreign takeovers.

One of Ericsson’s largest shareholders is Cevian Capital, an activist investor that would jump at the chance of a lucrative exit. It welcomed Mr. Barr’s speech Friday, albeit warning that any deal would have to be based on a “completely different valuation level than today.”

After years of slow growth and restructuring, both Ericsson and Nokia are indeed cheap on enterprise values of roughly eight times earnings before interest, taxes, depreciation and amortization. The attorney general’s plan is far from clear, but it might not need to work out for shareholders to see better days.

Write to Stephen Wilmot at [email protected]

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