Network effects

Nokia gets options with cheap NSN buyout

Nokia has got the better of Siemens. The Finnish mobile-phone company is buying out its German partner from their Nokia Siemens Networks joint venture for a cheap euro 1.7-billion ($2.2 billion). Nokia gets full ownership of this restructured and profitable telecoms-equipment business, while reducing its reliance on handsets. The purchase could also open the way to future deal-making.

The transaction is a bargain, valuing NSN at just 0.25 to 0.3 times forward sales. Barclays had put NSN's worth at 0.5 times sales, and says some analysts were at closer to 0.8 times. Presumably Nokia's existing 50 per cent stake in the business deterred rival bidders, while its own weak financial position limited the possible price.

It all goes to highlight the differences between buyer and seller. Siemens was desperate to quit a volatile, non-core, and low-margin business that it did not control. The Munich-based conglomerate is even part-funding the deal itself, through a euro 500-million vendor loan note. For troubled Nokia, NSN looks predictable, high-margin and cash-generative. Since 2011, NSN has cut euro 1 billion of costs and shed a quarter of staff to focus on mobile broadband and services. It has now been profitable for a year and provided euro 210 million of net cash to Nokia in the last quarter.

So, the move should make Nokia both more stable, and less reliant on mobile phones, where it is desperately fighting to reinvent itself. There are promising signs of growth in its Lumia range of Windows-based smartphones. But Apple and Samsung remain leagues ahead, and sales of budget "feature phones" are shrivelling even faster than feared. Bernstein reckons NSN will make up two-thirds of Nokia earnings by 2015.

And, a wholly-owned NSN is a new bargaining chip. In time, Nokia could float or sell the business to a rival at a much higher valuation. Or if the handset fightback flops, it could quit that business entirely. Then a sale to Microsoft or Huawei would allow Nokia to reinvent itself, like Swedish rival Ericsson, as a pure maker and servicer of network gear. That's perhaps not the future Nokia investors were buying into. But at least it's a future.