NSN buy raises Nokia solvency questions

On July 1, 2013, Siemens and Nokia announced that Nokia was buying Siemens’ stake in their Nokia Siemens Network joint venture. This marks the end of their six-year partnership and does not come as a surprise.

 

Because of its latest restructuring efforts, Siemens was on the lookout for an exit option, one that proved to be difficult to find because its 50% non-controlling stake in NSN represented an unattractive and expensive investment for an outsider that would not be able to influence the company’s direction. It seems that Nokia’s offer came at the right time.

 

In general, investors and analysts reacted positively to the news, mainly because of the low price of the deal. Nokia will pay Siemens €1.7 billion ($2.2 billion) for its stake in NSN, €1.2 billion of which is to be paid in cash upon completion and the rest by debt a year after completion.

 

Since 2009, Nokia’s total debt has been generally stable while its net debt has fallen (see fig. 1). But the decrease in net debt has not been enough to compensate for Nokia’s fall in EBITDA, which had a negative impact on net debt/EBITDA, a key metric, monitored by the credit-rating agencies and investors. Net debt/EBITDA has crossed the “save heaven” [sic] of 2.0, nearly doubling to 2.7 between end-2011 and end-2012.

 

 

The major rating agencies are already questioning the effect this deal will have on Nokia’s relatively healthy balance sheet. The credit rating of Nokia’s debt was downgraded because of the news. S&P reduced Nokia’s long-term debt rating by one notch, to B+, placing it among the highly speculative issuers.

 

The payments for NSN will have a negative impact on Nokia’s cash and debt. At the same time, Nokia’s EBITDA will not be boosted by the EBITDA of NSN, since Nokia already fully recognizes NSN’s operations in its financial statements, because of its controlling stake in the JV. Assuming that all other variables remain constant, the transaction will cause net debt/EBITDA ratio to reach a high level of 4.8.

 

 

This will put a strain on Nokia’s ability to borrow and will play an important role during Nokia’s refinancing efforts. Based on Nokia’s 2012 annual report, Nokia will need to refinance €1.75 billion of its interest-bearing liabilities (nearly 40% of the total) in early 2014 as well as a €600 million NSN bank term loan due in 1Q14. This will put a further strain on Nokia’s resources.

 

It is important to note that NSN has been undergoing a restructuring program since 2011, when it announced that it would begin focusing on mobile broadband and services. These divesting and streamlining efforts have affected its financial results. A fall in annual sales in 2012 was also linked to lower infrastructure-equipment sales, partially offset by higher sales from services. This raises a question of how well hedged NSN’s new strategy is against the general downturn in company spending.

 

NSN has expressed satisfaction with the execution of the restructuring program and has also been winning significant contracts, such as deals with SoftBank Mobile and KDDI in Japan, and TIM Brasil and Claro Chile in Latin America. Should this positive trend continue, NSN will become a strong and focused member of Nokia’s problematic portfolio and will provide Nokia with the time needed to turn around its handset division. The sustainability of this positive scenario depends on Nokia’s refinancing skills. We have dealt with this topic in more depth in this breaking view.

 

For sure, all eyes will be on Nokia’s 2Q13 earnings.