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Nokia buys profitable NSN at fire sale price

by Sue Rudd | Jul 02, 2013

Almost exactly seven years after it agreed to form the 50/50 joint communications networking venture with Siemens in 2006, - and days before the deal would expire - Nokia is buying 100% ownership of that Nokia Siemens Networks (NSN) operation.The deal should close by the end of September.

Siemens has reportedly been looking for some time to sell their interest in NSN which has become a Mobile Broadband company and no longer essential to Siemens business. It appears that Siemens was unable to find an outside buyer and so is now selling NSN to Nokia at a ‘fire sale’ price.

Today Nokia announced that it would be buying out Siemens 50% share for €1.7 billion ($2.2 Billion), of which €1.2 billion will be paid in cash. Nokia expects to have about €4 Billion net cash as of the end of June 2013. Siemens may also offer a transitional loan for the remaining €500 thousand . In 2012 NSN sales were over €13 billion – compared to over €30 billion for Nokia. NSN’s operating profit was over €800 million and gross margin was 30.7%. So €1.7 billion represents just over 2 years NSN operating profit. According to the Wall Street Journal this price is estimated to be about one third of what analysts has expected representing “an enterprise value for NSN of just 0.2 times sales ”. Calculated as €1.7B*(1/0.5)/€13B that is actually 0.26 times total sales.

Nokia likes NSN’s Cash

NSN was already helped by part of the €800 million cash from NSN in the first quarter of 2013 as it worked to launch its new Windows Phone 8 Lumia devices. According to Strategy Analytics Wireless Device Strategies report ‘Q1 '13: Nokia: Lumias Rise But Not Fast Enough’ “Nokia saw demand for its fresh line of Windows Phone 8 based Lumia smartphones steadily grow as it expanded the reach to hundreds of new markets..(and) tighter cost controls and lower operating expenses helped Nokia sneak out some positive operating profits. However, Nokia has its work cut out for the rest of 2013 to ramp up Lumia smartphone shipments quickly…” And Nokia needs cash to innovate fast and to avoid losing further share in mobile phones.

NSN’s operating profits should help fund the struggling Nokia while continuing NSN’s own Research and Development Investments.

NSN is now a highly focused Mobile Broadband player.

Since 2007 NSN has made acquisitions and divestitures to create a highly focused Mobile Broadband entity.

·      In 2011 NSN acquired Motorola’s networking business for only $975 million gaining customer business relationships with 50 telecom operators and strengthening its position with China Mobile, Clearwire, KDDI, Sprint, Verizon Wireless and Vodafone. In August 2011 NSN initiated layoffs of 1,500 of Motorola’s 6,900 employees. The WiMAX product line had already been eliminated earlier by Motorola and these layoffs eliminated overlap in GSM and 4G. 1,200 people were then transferred to NSN’s LTE and WCDMA units.

·      In June 2012 NSN completed the sale of its Microwave Transport and the associated Operational Support Systems (OSS) business to Dragonwave - a deal initiated in 2011.

·      In December 2012 NSN agreed to sell its Optical Networks business to Marlin Equity Partners.

·      In March 2013 NSN sold its Business Support Systems (BSS) including its Policy Control (PCRF) unit to Redknee.

Now Motorola has been absorbed and Microwave, OSS, BSS and Policy Control (PCRF) businesses are gone. As a result in March of this year NSN was able to refinance over €200 million more than the initial €600 million debt than it was seeking – indicating that financial markets believe in the company. And NSN is continuing to streamline the company. According to Forbes “By the end of 2013, NSN aims to cut around 17,000 jobs and achieve a total of $1.35 billion in savings as (the final) part of the restructuring initiative announced in late 2011.”

As we noted in our Report ‘Complete Mobile Infrastructure Player? Did Cisco just add final piece to Mobile Jigsaw Puzzle?’ NSN is getting the highest share of any Infrastructure vendor from its systems and professional services business “Ericsson (Q1 2013) generated 41% of its revenues from (these) services, while in Q1 2013 Alcatel-Lucent generated about 29% and Nokia Siemens Networks 51%. Being in a position to capture these service revenues and their margins is extremely important to the profitability of mobile infrastructure suppliers.”

NSN has taken the right steps to restructure and focus its business and now has a good prospect for success in competition with behemoths in the Mobile Telecomms Infrastructure business like Ericsson, Huawei and Alcatel Lucent.

Being relatively small and nimble may be NSN’s secret weapon. “Nokia doesn’t plan to integrate Nokia Siemens and may still decide to seek partners” noted Chief Executive Officer Stephen Elop. Hopefully Nokia will continue to balance NSN’s investment needs with the requirements of its device business.

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