What Nokia’s Sale Of HERE Means

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After much speculation, Nokia (NYSE:NOK) finally sold its mapping unit – HERE – to German automakers Mercedes, BMW and Audi. The transaction was originally announced in August, and Nokia recently issued a press release stating that the sale had been completed. [1] The deal, valued at EUR 2.8 billion, fetched Nokia a premium of almost 30% over HERE’s book value, but it was expected that the premium could go up to 100% owing to the potential utility of the map service.

There is a recognized demand for effective location-based services, and services such as HERE could fill in the gaps for a diverse range of businesses including Internet providers, social networks, car makers and delivery services. However, considering that much of HERE’s hidden potential was in areas other than the automobile sector, a 30% premium coming from the automakers is certainly not bad. With its mapping unit gone, Nokia will now divert its resources and focus to its Networks business.

HERE was garnering interest from some of the biggest names in technology, including Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and China’s Alibaba Group. The German automakers should be able to unlock some value with HERE, which Nokia was unlikely to take advantage of after the sale of its handset business to Microsoft (NASDAQ:MSFT).

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Our $8 price estimate for Nokia is about 15% ahead of the current market price.

See our complete analysis for Nokia stock here

The HERE Business

HERE is Nokia’s mapping and location intelligence business, which contributed 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 auto 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 had 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 company Earthmine in 2012. [2] [3] 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. [4] ((Press Release- Medio Acquisition, Nokia, June 12 2014))

Nokia provided 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). [5] Microsoft was one of Nokia’s biggest customers, with its four-year licensing deal to use HERE on its mobile devices. Nokia had made several efforts to expand HERE on non-Windows platforms, and apart from finding potential suitors for the unit business, this laid a solid foundation for HERE’s long term growth, which should now benefit Audi, BMW and Mercedes.

How HERE Will Work For German Automakers

Audi, BMW and Mercedes Benz together bought the HERE unit from Nokia and they now plan to develop its technology further for their self-driving cars. Currently, HERE employs over 6,500 people and, with its 80,000 data sources, powers navigation systems for many cars. Going forward, HERE is likely to become more than just a simple navigation service as it plans to incorporate anonymized data from Audi, BMW and Daimler vehicles in order to deliver real-time maps. In a blog post, the HERE team mentioned that availability of new data from various sources will greatly help in the development of next-gen maps. The ultimate goal of the company is to make the map more precise and accurate, bringing it close to a 1:1 scale, which would ultimately make it usable for self-driving cars. [6]

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Notes:
  1. Nokia completes the sale of its HERE business to a consortium of leading automotive companies, Nokia, Dec 4 2015 []
  2. Nokia to buy Navteq for $8.1 billion, CNET.com, October 1 2007 []
  3. Earthmine Acquisition, Here.com, Nov 13 2012 []
  4. Press Release- Desti Acquisition, Nokia, May 30 2014 []
  5. Nokia to Buy Medio for Analytics Data in Map Push Against Google, Bloomberg, June 12 2014 []
  6. Starting today, it’s a new world for HERE, HERE 360, Dec 7 2015 []