Analysis: Nokia gets Siemens' NSN stake for a steal, but will that be enough?

Nokia's (NYSE:NOK) $2.21 billion purchase of Siemens' 50 percent stake in their Nokia Siemens Networks joint venture is less than analysts had reportedly been expecting, leading many to conclude that Nokia got the share for a bargain. The questions multiply from there: Will owning the networks business inject enough strength into Nokia's balance sheet, and what will the long-term future of the business be?

Nokia's purchase values the entire venture at around $4.4 billion, but many financial analysts had believed before the purchase that a 50 percent stake was worth at least twice what Nokia wound up paying for it. Looked at it another way, according to the Wall Street Journal, the purchase implies an enterprise value for NSN of just 0.2 times its sales, while analysts had valued it around 0.6 times. Market leader Ericsson (NASDAQ:ERIC) trades at 0.9 times.

However, Nokia CEO Stephen Elop has described the deal as opportunistic, and the value partly reflects Siemens' desire to exit the business (which it indicated strongly earlier this year) as well as Siemens' lack of options. There was considerable talk ahead of the deal about Siemens searching for a private equity firm to buy its stake or the entire venture, as well as continued rumblings about an initial public offering for NSN. Nokia has said it will "continue to strengthen the company as a more independent entity."

The questions now are what Nokia will do with the business and whether the purchase reflects any long-term change in strategy for Nokia, which has been struggling to turn around its key devices and services business on the back of its Lumia-branded Windows Phones and its Asha touchscreen phones designed for emerging markets.

Nokia's cash position will grow more precarious as a result of the deal; Nokia said had the deal closed during the second quarter its net cash would have been reduced to between $2.6 billion and $3.25 billion. However, Fitch Ratings said in a research note that the move is positive because "NSN's future looks more secure than that of the group's devices and services business. NSN's strategy of focusing on higher-margin projects and more profitable regions at the expense of a broader geographic scope seems to be paying off."

One possibility for NSN remains an IPO, according to a Bloomberg report that cited unnamed sources, while another could be some kind of tie-up with Alcatel-Lucent (NYSE:ALU), though no decisions have been made. Elop said NSN still has many options.

"Nokia has many more options now it owns 100 percent," an unnamed source close to Nokia told the Financial Times. "It is a lot more valuable." During the first quarter, NSN contributed $274 million to Nokia's net cash position and achieved underlying profitability for the fourth consecutive quarter and positive cash flow for the sixth consecutive quarter.

One key question is whether NSN's improved financial performance will be enough to bolster any continued weakness in Nokia's device businesses, which is still struggling to gain traction.

"NSN is a cash-generative asset and that creates a buffer--but is it enough of a buffer?" the unnamed source close to Nokia told the FT. "The next one or two quarters will tell."

For more:
- see this WSJ article (sub. req.)
- see this FT article (sub. req.)
- see this Bloomberg article

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