What’s Left of Nokia? Microsoft Deal Changes Nokia’s Focus; Remaining Business Largely Focused on Network Equipment; Nokia handsets sale reveals revamped networks value

September 3, 2013, 10:15 a.m. ET

Deal Changes Nokia’s Focus

Remaining Business Largely Focused on Network Equipment

SAM SCHECHNER

What’s left of Nokia NOK1V.HE +33.94% Corp.? The Finnish company’s proposed $7 billion deal to sell its unprofitable cellphone business to Microsoft Corp MSFT -5.48% . will leave behind 56,000 employees and a collection of businesses focused mainly on making network equipment for cellphone operators. But it will also hold on to a lucrative patent portfolio and a mobile-mapping business that competes with Google Inc. GOOG +1.11% and Apple Inc. If a deal is sealed, Nokia will emerge about half the size it is today, by revenue, but profitable.“Clearly Nokia looks very different,” said Nokia Chairman Risto Siilasmaa at a news conference Tuesday. Mr. Siilasmaa will serve as interim chief executive after the planned departure of current CEO Stephen Elop to Microsoft.

The deal could also leave the company with a war chest of cash, which it could return to shareholders or deploy through acquisitions. Investors cheered the move, pushing Nokia stock up over 40% Tuesday.

If Nokia opts to pursue acquisitions one possible target could be the wireless assets of unprofitable Franco-American telecom-gear maker Alcatel-Lucent SA, which could be combined with Nokia’s main network-gear unit. One person close to Nokia said such a deal could eventually make sense, but it isn’t something the board is ready to consider. An Alcatel spokesperson declined to comment.

Nokia’s network-gear unit, dubbed Nokia Solutions & Networks, or NSN, is a former joint venture with Siemens AG that Nokia agreed to buy out for €1.7 billion ($2.24 billion) over the summer—sealing the deal at the same time it was in intense negotiations with Microsoft. NSN represented over 90% of Nokia’s revenue in 2012, excluding its cellphone division.

NSN is in the midst of a turnaround, after years of losses partly as a result of heavy competition in the telecommunications-equipment sector. It and other players have been squeezed between the rapid growth of Chinese giant Huawei Technologies Co. and the heft of leading incumbent Ericsson.

But the business is now profitable, following both strong sales to U.S. cellphone operators and a turnaround plan that slashed costs at the once-bloated former JV.

Nokia will also retain its mapping service, dubbed Here, built into cars and mobile devices, and it is hanging onto much of its intellectual property portfolio. Mr. Siilasmaa said Tuesday its patents bring in revenue of roughly half a billion euros per year. Microsoft, as part of the deal, has agreed to license both mapping services and other patents from Nokia.

Moving away from mobile phones is just the latest change for a firm that started as a paper mill in 1865, and has had past lives producing rubber boots and electronics. In the 1980s, it moved into mobile phones, with models that initially weighed nearly 2 pounds and looked like bricks.

“I feel sadness because, inevitably, we are changing Nokia and what it stands for,” said Mr. Elop, the outgoing CEO. “And yet, there is also a feeling of absolute resolve and conviction that we have to do the right thing.”

Nokia handsets sale reveals revamped networks value

10:58am EDT

By Georgina Prodhan

VIENNA (Reuters) – Nokia’s $7.2 billion sale of its core phones division to Microsoft leaves three disparate high-quality business units whose value should benefit from the deal.

The central operating business will now be the cleaned-up networks unit NSN – once again profitable and wholly owned by Nokia after buying out former partner Siemens – along with a mapping unit and a valuable collection of patents.

Financial analysts said on Tuesday they saw potential for Nokia’s value by the sum of its parts to rise by up to 5 billion euros or 45 percent over Monday’s close after shedding the loss-making handsets unit and acquiring a pile of cash.

Nokia shares were already up 36 percent at 4.04 euros by 1410 GMT on Tuesday, as hedge funds rushed to cover their short positions on news of the sale to Microsoft.

“The sum-of-the-parts valuation has been indicating for some time that the handset business was polluting the value of the other assets,” analyst Richard Windsor of Radio Free Mobile wrote in a note. “Nokia shareholders are the big winners.”

Wells Fargo, in a note entitled “Removing the Albatross”, wrote: “We view this positively for Nokia, as we believe the path for the Device & Services business was fraught with peril given competitive forces and its limited product acceptance.”

The Finnish company, once the world’s dominant handset maker, had failed to close the big lead held by Apple and Samsung in the smartphone market before announcing it would sell the business to Microsoft.

Nokia had already tied the fortunes of its handsets business to Microsoft’s untried Windows Phone operating software more than two years ago.

“Instead of one Nokia, there will be two global technology companies in Finland, both financially stronger,” interim Chief Executive Risto Siilasmaa told journalists. “This transaction creates more value for Nokia than could otherwise be realized.”

Network equipment business NSN has emerged as a profitable mobile broadband specialist after years of brutal restructuring during which it shed 20,000 jobs, more than a quarter of the workforce, and quit the fixed-line business before buying Siemens’s 50 percent.

Janardan Menon, technology analyst at Liberum Capital, called the other two remaining Nokia units also “great quality”.

He said the patents business, with annual income of about 500 million euros, was one of the industry’s most cash-generative, while the mapping business’s 85 percent market share in automotive positioned it for good growth and profitability.

BREAK-UP

The shedding of the handsets business is already raising expectations of a stock market listing for NSN or the sell-off of the mapping and patents businesses.

“Now they are part of a company which has two other – in my view, rather unrelated – activities going on,” said networks analyst Dan Bieler of technology research firm Forrester.

“It looks increasingly like some kind of holding company. Wouldn’t it be better to break the whole thing up entirely?” he asked. “I wouldn’t be surprised if this is something they would look into more earnestly now.”

In various sum-of-the-parts scenarios, JP Morgan valued NSN at between 6.07 billion and 12.1 billion euros – 0.5 to 1.0 times 2014 sales – compared with the 0.3 times 12-month forward sales at which bigger French rival Alcatel-Lucent trades.

The mapping and location services business was valued at 1.02 billion euros, while the intellectual property business – a collection of about 10,000 patents – at 5.64 billion.

Microsoft is paying 1.65 billion euros for a 10-year, non-exclusive use of Nokia’s patents as part of the bigger deal, with an option to extend into perpetuity.

A merger of NSN with Alcatel-Lucent has often been mooted as a way for the smaller European players to compete more effectively with Huawei and Ericsson in a cut-throat industry where price wars are the norm.

Bieler said, however, a merger with the French gear maker – or any other – looked less attractive for NSN now, given its relatively strong position.

As a smaller, leaner company focused on fourth-generation LTE and future mobile technologies, NSN is well placed to take advantage of an acceleration in the build-out of LTE networks around the world.

IT research firm Gartner expects global spending by telecoms operators on LTE networks to rise to $16.9 billion next year from $10.8 billion this year as China, Latin America and India catch up with North America, Japan, Korea and Scandinavia.

“Being a lean specialist of mobile broadband and LTE – that’s working now. As long as they’re allowed to keep doing that, they’ll play a role,” said Gartner analyst Sylvain Fabre.