There was never really a question as to if Nokia (NYSE:NOK) and Siemens (NYSE:SI) would unwind their 50/50 partnership in Nokia Siemens Networks. Siemens had made it quite clear that they were considering all options for monetizing their stake and continuing their own plan to streamline operations. What's more, it was becoming increasingly clear that there was minimal third-party interest and that going the IPO route wasn't likely to realize full value. Curiously, though, Siemens has chosen to sell its stake in the venture to Nokia at a pretty undemanding valuation.
A Not Completely Surprising Deal
As I've mentioned before, Nokia buying Siemens' stake in Nokia Siemens was always an option, particularly after the companies appeared to find only tepid interest among third-party buyers and in the IPO market. With Siemens apparently not wanting to hold off any longer on its plans to streamline and reorganization its operations and assets, the two companies came together on a deal.
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Nokia will acquire Siemens' stake in NSN for a total value of 1.7 billion euros, with 1.2 billion in cash upfront and the other 0.5 billion in the form of a secured loan from Siemens that Nokia needs to repay within a year. The deal is expected to close at some point in the third quarter, at which point Nokia will continue to run it as a relatively autonomous entity.
Is Siemens Getting Played?
On first blush, it looks like Nokia is taking advantage of its partner. At just 1.7 billion euros, Nokia is paying about 0.28x sales for a business that seems to be a whole lot stronger than it was even just a year ago. If Nokia Siemens Networks (which Nokia intends to rename after the deal) can get to high single-digit or low teens operating margins, this will indeed be a value-creating deal for Nokia.
But I'm not sure Siemens is getting a terrible deal. First, NSN has significantly less market share than Ericsson (Nasdaq:ERIC) in the overall carrier equipment space, and is #3 behind Huawei. Even in those areas where NSN is much stronger, principally mobile/wireless, it's worth asking how much of its improvement has been a byproduct of strong deployments for T-Mobile US (Nasdaq:TMUS) and Japanese and Korean carriers that will not be repeated again soon.
Second, Siemens wanted out and they wanted out quickly. There was zero chance that regulators in the U.S. or Europe were going to allow Huawei to acquire this business, and neither Ericsson or Alcatel-Lucent (NYSE:ALU) were going to be buyers either. With NSN on the block for so long, it became pretty clear that a strategic sale wasn't going to happen. What's more, given the on-again/off-again nature of carrier spending and the timing and expense of an IPO process, I don't think Siemens is all that upset to have a deal that lets them move on with their post-NSN plans. Said differently, whenever there's a motivated seller and one that needs to sell quickly, it's quite rare to see that seller get anything like full value.
What Now For Nokia?
Nokia's next move(s) will be very, very interesting to watch. There have been rumors that the company has talked with Microsoft (Nasdaq:MSFT) about a sale of the Windows phone business, and the Financial Times recently reported rumors that Huawei had some interest in acquiring Nokia (before the NSN transaction), rumors which Huawei's management appeared to confirm.
If Nokia wants to sell the handset business, I think they can. I don't think there would be the same regulatory issues with approving a sale to Huawei, and Nokia may find that other bidders like Lenovo (Nasdaq:LNVGY) would be interested in a business geared towards lower-end smartphones with strong logistics assets. Likewise, Nokia could put its patents and IP in areas like location on the block separately or tied in with the phone business.
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The downside in all of this is that it would basically turn Nokia into a telecom equipment provider. But given the relative differences in market share (and, more importantly, the trends in those shares) between Nokia's phone business and the NSN business, maybe that's not so bad.
The Bottom Line
I think Nokia's best chance for long-term survival is to get out of the handset business while there's still enough global market share to secure a solid price. Maybe this would be selling at or near the bottom, and maybe Windows-based phones are about to take off, but I just don't believe Nokia management is in a position where turning this business around is likely. With solid management in place at NSN, maybe the right move now is to hold an auction for the phone and IP assets, IPO the carrier equipment business, pay out the cash as a special dividend and basically unwind Nokia as a going concern.