HELSINKI (Reuters) - Nokia shares surged on Monday after it announced plans to buy out Siemens AG’s share of their network equipment joint venture, betting on the technology to run 4G networks as it struggles in the smartphones business.
Loss-making Nokia gains full control of the profitable venture Nokia Siemens Networks (NSN) for $2.2 billion, a cheaper than-expected price, analysts said, though they also noted the acquisition would put pressure on Nokia’s balance sheet.
“With this transaction, Nokia buys itself a future, whatever happens in smartphones and feature phones,” Bernstein analyst Pierre Ferragu wrote in a note to clients.
However, the cash cost is still a risk for a company that is burning money to keep its handset business running.
Rating agency Fitch said the acquisition made strategic sense, but added that the visibility of Nokia’s mobile phone business was still very limited and that it was taken into consideration of Nokia’s BB- or junk rating.
Nokia’s stock was up around 5 percent, having earlier hit a five-month high, a rally fuelled in part by short covering. Nokia has 14.6 percent of its shares out on loan, making it one of Europe’s most heavily shorted stocks by hedge funds, which were caught off guard by news of the buyout and scrambled to close their negative bets on the stock, traders said.
Siemens shares were more than 2 percent higher, as the German firm prepared to get out of a business that analysts said had weighed on the stock due to high restructuring costs.
Morgan Stanley said the price Siemens would receive for its stake was at the low end of estimates, but it was “encouraged by the fact that this is a clean solution”.
“Despite the optically low price at this time, we believe this is the best possible outcome for Siemens shareholders.”
Nokia’s future has been cloudy since it fell behind rivals Apple Inc and Samsung Electronics Co Ltd in the smartphone race, making the decision to switch to Microsoft’s untried Windows software in 2011.
Nokia’s smartphones and mobile phones have reported declining sales since the first quarter of 2011. The devices and services unit posted an underlying loss of 703 million euros in 2012 down from a profit of 1.7 billion euros in 2011.
According to research company Gartner, Samsung was the number one smartphone maker in the first quarter, with 30.8 percent of the market ahead of Apple’s 18.2 percent. Nokia was a long way adrift, behind LG Electronics, Huawei and ZTE.
In contrast to Nokia’s phone business, NSN turned profitable in the second quarter of 2012 after slashing costs and as its focus on fourth-generation Long Term Evolution (LTE) networks began to pay off.
NSN’s adjusted earnings before interest and taxes (EBIT) amounted to 778 million euros in 2012. Its adjusted operating profit margin was 5.6 percent compared with minus 4.5 percent at the devices and services unit. The improvement in profitability has been mainly due to cost cuts.
NSN said in late 2011 it would axe 17,000 jobs to help cut annual operating costs by around 1 billion euros. By the end of the first quarter of this year, it had reached the job reduction target.
Nokia will pay 1.2 billion euros in cash and the other 0.5 billion euros in the form of a secured loan from Siemens that will be repaid later.
“Nokia Siemens Networks has established a clear leadership position in LTE, which provides an attractive growth opportunity,” Nokia Chief Executive Stephen Elop said in a statement.
Elop, long under fire for sticking with a Windows handset operating system that did not catch on with consumers, said the acquisition did not mark a shift in strategy for Nokia. NSN would continue to run as an independent entity and he did not rule out listing or selling it.
“As for the future of NSN, as we’ve said consistently there is a range of options that could exist for NSN over time. All of those options remain open,” he told a conference call.
Nokia Siemens Networks is the third-biggest provider of mobile network equipment, with 15 percent of the market at the end of 2012, according to market research firm Gartner. It trails Sweden’s Ericsson, with 35 percent, and China’s Huawei, with 17 percent.
NSN won key contracts in early-adopter countries such as Softbank in Japan and SK Telecom in Korea, and its technology has proven popular with European operators SFR in France and Telefonica for its British and German roll-outs, but it remains weak in the key United States.
Finnish daily Helsingin Sanomat reported on Monday, citing a document it had seen, that NSN was planning to sell its plants.
NSN CEO Rajeev Suri told the conference call his firm was always looking “for ways to be more efficient, but we have no announcements to be made regarding NSN’s manufacturing or production network”.
Danske Capital portfolio manager Juha Varis said that if Nokia wanted to boost its cash position “maybe they should consider selling NSN manufacturing”.
For its part, Siemens has made no secret of its desire to exit NSN, having said often that the telecoms market is a tough one to be in, whether as an operator or an equipment maker.
“The fact of the matter remains that this obviously is an industry which you rather avoid if you can help it,” Chief Financial Officer Joe Kaeser told analysts back in November at the group’s full-year results presentation.
Siemens said the sale price of its NSN stake was based on a fair valuation of the business according to the joint venture contract, without specifying the method used to determine its value.
Nokia and Siemens formed the 50-50 joint venture in April 2007 and the agreement lapsed in April this year. Nokia had said it had wanted NSN to be sold or listed and many analysts had believed it might be sold.
Nokia said it expected to close the transaction, subject to regulatory approval, during the third quarter of this year.
Nokia said it estimated its net cash position was 3.7-4.2 billion euros, adding that if the NSN deal had closed in the second quarter, its net cash position would have been 2.0-2.5 billion euros.
($1 = 0.7693 euros)
Additional reporting by Victoria Bryan, Peter Dinkloh, Christoph Steitz and Blaise Robinson; Editing by Peter Graff and Will Waterman