Nokia May Sell Map Unit As It Looks To Acquire Alcatel-Lucent
Nokia (NYSE:NOK) is reportedly exploring the sale of its map business in a bid to increase its focus on its Networks unit as well as improve its debt rating, according to a recent Bloomberg report. The report also stated that Nokia has already reached out to potential buyers including a group of German car makers, some private equity firms as well as Uber Technologies. HERE contributed 7.6% of Nokia’s company wide sales in 2014, up from 7.2% in 2013. Its sales of new vehicle licenses grew over 22% year-over-year (y-o-y) last year to 13.1 million, driven by higher uptake of in-vehicle navigation systems by customers as well as higher vehicle sales. Based on its current financial performance and conservative future growth estimates, HERE’s valuation comes to around $2 billion. [1]
However, we believe that it could be valued at around twice this amount by potential buyers who could use the mapping service to add value to their existing businesses going forward. HERE’s current standalone valuation may not take into to its full potential considering that apart from the automobile sector, it has yet to adequately monetize its services, and that it only recently refocused its strategy towards automotive and enterprise and away from its direct-to-consumer business. Nokia’s choice of potential buyers (car makers, Uber, private equity firms) also suggests that it is looking at companies who can extract effective synergies with HERE going forward, which Nokia itself is unlikely to take advantage of, after the sale of its handset business to Microsoft (NASDAQ:MSFT) for $7.2 billion in 2013.
Our $8 price estimate for Nokia is about in line with the current market price.
See our complete analysis for Nokia stock here
The potential sale of the map unit also increased speculation of a possible acquisition of rival telecom equipment maker Alcatel-Lucent’s wireless business by Nokia to improve its share in the global wireless infrastructure market. This was confirmed by both companies in a joint statement today, which said that they were in advanced talks for a complete merger. It is difficult to accurately anticipate synergies between both companies beyond their wireless divisions, and a merger does raise questions over Nokia’s strategy of sticking to its core Networks space. [2] [3]
On the other hand, the merger of their wireless businesses will help Nokia better compete in the mobile infrastructure market against bigger rivals such as Ericsson and Huawei (combined 68% share), and also help improve margins owing to significant cost and revenue synergies. However, the cost and revenue synergies will also likely result in the loss of many jobs at both companies. This is being reported as a possible hurdle in negotiations with French government officials working to protect some of the research jobs in their country. Although details are unclear, some market insiders speculated that a bid for Alcatel-Lucent could come as soon as this week. Alcatel-Lucent’s stock has surged over 10% since news about a possible merger broke out and it is currently valued at over $12 billion, compared to Nokia’s $30 billion. It is not clear whether Nokia would go ahead with a bid for Alcatel-Lucent if it is unable to sell its HERE business, as that would have provided it with cash to partially fund the deal. We will keep a close watch on the developments.
In 2014, Nokia’s overall revenues were about flat y-o-y at €12.7 billion ($13.99 billion) owing to sluggish Nokia Networks sales which were offset by strong performances by HERE Maps and Nokia Technologies. Networks is the largest business division for Nokia, contributing about 90% of the company’s sales and about 54% of the company’s value, according to our estimates. We believe that Nokia Networks gaining share in the global wireless infrastructure market and the company improving its Networks EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization) margin will be most accretive to Nokia’s value going forward.
The HERE Business
HERE is Nokia’s mapping and location intelligence business, which currently contributes less than 3% of the company’s valuation, according to our estimates. The division’s sales grew 6% y-o-y in 2014 to €970 million ($1.02 billion) with an operating loss of €32 million, excluding a goodwill impairment charge of €1.2 billion. Sales to automobile customers represent over 50% of total HERE sales, and the growth last year was aided by higher auto sales as well as higher uptake of in-vehicle navigation systems by customers.
Nokia has built the business primarily through acquisitions, starting with its buyout of Berlin-based gate5 in 2006, followed by the acquisition of Chicago-based Navteq for $8.1 billion in 2008 and 3-D map technology expert Earthmine in 2012. [4] [5] The company also made a few interesting acquisitions last year, including Desti and Medio Systems, to make its HERE unit more personalized and intuitive and boost the long-term potential of its mapping business. ((Press Release- Desti Acquisition, Nokia, May 30 2014)) ((Press Release- Medio Acquisition, Nokia, June 12 2014))
Nokia provides its map data to 80% of all car-navigation systems in the world and several major enterprises including Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT). [6] Microsoft is one of Nokia’s biggest customers, with its four-year licensing deal to use HERE on its mobile devices. We expect the recent efforts to expand HERE on non-Windows platforms as well as recent acquisitions and investments to help the company lay a solid foundation for its long-term growth and attract customers going forward.
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- Nokia Weighs Sale of Maps Business to Focus on Networks, Bloomberg, April 10 2015 [↩]
- Nokia in Advanced Talks to Acquire Alcatel-Lucent Assets, Bloomberg, April 13 2015 [↩]
- Nokia says it is in advanced talks to buy Alcatel-Lucent, BGR News, April 14 2015 [↩]
- Nokia to buy Navteq for $8.1 billion, CNET.com, October 1 2007 [↩]
- Earthmine Acquisition, Here.com, Nov 13 2012 [↩]
- Nokia to Buy Medio for Analytics Data in Map Push Against Google, Bloomberg, June 12 2014 [↩]