Apr 15, 2015 Helsinki/Paris

Nokia is to buy Alcatel-Lucent in an all-share deal that values its smaller French rival at 15.6 billion euros ($16.6 billion), building up its telecom equipment business to compete with market leader Ericsson.

The deal will redefine a sector suffering weak growth prospects and pressure from low-cost Chinese players Huawei and ZTE.

With about 114,000 employees and sales of around 26 billion euros, the combined company will rank a strong second in mobile equipment, with global market share of 35 percent, behind Ericsson at 40 percent and ahead of Huawei's 20 percent, according to Bernstein Research.

The new Nokia will have stronger exposure to the important North American market, with major AT&T and Verizon contracts.

It will also fill gaps in its product portfolio with Alcatel-Lucent's technology in optical transmission and Internet routers, which help telecom operators handle the ever-increasing volume of data brought on by users surfing the web on their smartphones and watching Netflix at home.

While Huawei does have a complete product line across both fixed and mobile, Ericsson does not and may have to react with deal-making or partnerships, executives said.

Nokia will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their old shares, putting 33.5 percent of the entity in Alcatel shareholders' hands if the tender offer is fully taken up.

The deal will be finalised in the first half of 2016 and is expected to result in 900 million euros of operating cost savings by the end of 2019, the companies said on Wednesday.