Nokia (NYSE:NOK) seems to have scored a major coup by buying out Siemens’ stake in their joint venture, Nokia Siemens Networks (NSN), at a dirt cheap price. The deal, which Nokia confirmed with a press release Monday, values Siemens 50% stake in the venture at 1.7 billion Euros – 1.2 billion Euros of which will be paid in upfront cash by Nokia (financed by bank loans) and the rest a year later. The purchase price is more than 70% lower than our estimate of NSN’s fair value given its ongoing turnaround that is improving margins, generating cash and has put it in a very strong position in the 4G LTE world. How cheap the deal is for Nokia can also be gauged from the fact that NSN generated over 1.4 billion Euros in free cash flow during 2012 itself.
The extremely low valuation for the stake sale shows Siemens’ desperation at getting rid of a non-core asset which wasn’t aligned with its long-term goals, and that it has been looking to exit for quite some time now. Siemens might however have found it tough to find a private equity buyer willing to pay for its 50% non-controlling stake, leaving it with few options but to sell to Nokia for a clear exit. As for Nokia, the deal may load Nokia’s balance sheet with more debt and decrease its net cash position, but it also gives it a business that is turning around and has been generating a lot of cash in recent quarters. It also reduces the risks attached to its device business where the company has been bleeding market share amid a slow transition to Windows Phone. As per our estimates, NSN contributes over 35% to Nokia’s value currently and will only become a much larger value contributor once the deal closes.
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Over the past year, Nokia Siemens Networks has increasingly shown signs of turning the corner as a result of an ongoing restructuring that has not only helped improve its operating margins but also restored focus on its wireless business. As a result, NSN has fast emerged as the leader in the ongoing 4G LTE transition around the world and is taking share away from competitors. As of the third quarter of last year, NSN had succeeded in increasing its market share to about 20% share of the wireless infrastructure industry, only 2% behind #2 player, Huawei.  It now expects to reclaim its #2 spot behind Ericsson by the end of 2013. Most of these gains should come on 4G LTE – a market NSN managed to capture almost 22% of in Q3 2012, up from 13% the previous year.
Apart from revenue share gains, NSN is also benefiting from the streamlining of operations and the ongoing job cuts. By the end of 2013, NSN aims to cut around 17,000 jobs and achieve a total of $1.35 billion in savings as part of the restructuring initiative announced in late 2011. Simultaneously, NSN has been selling off non-core assets and increasing its focus on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market. As a result of the reshuffle, NSN has performed really well recently, returning to operating profitability in Q4 2012 and managing to turn a small profit in a seasonally weak Q1 as well. We estimate NSN’s EBITDA margins in 2012 to have doubled over the previous year. This is a big positive sign that the company’s cost-cutting initiatives are taking hold – a trend we expect to continue in the coming years as well.
From a cash flow perspective, NSN is even more valuable to Nokia. While the venture has been less consistent in turning profits, it has generated cash for the last six quarters now. At a time when Nokia is conserving cash by suspending dividend payouts and leasing its headquarters instead of owning it, NSN is proving highly valuable with its steady cash flows despite not being a core asset. Last quarter, for example, the company managed to generate cash solely because of NSN’s performance. While NSN generated more than 230 million euros in free cash flow last quarter, Nokia Group, as a whole, could manage less than 90 million Euros.Notes:
- Nokia Siemens gains market share in telecom equipment: Dell’Oro, November 13th, 2012 [↩]