When the rumors started swirling a couple of weeks ago that Siemens (SI 2.45%) was shopping around its 50% ownership stake in Nokia Siemens Networks, the profitable joint venture it has with Nokia (NOK 3.62%), fans of the Finnish smartphone maker couldn't help but wonder how it would impact Nokia's turnaround efforts. It became clear when Nokia reported its fiscal 2013 Q1 earnings that NSN's fourth straight quarter of profitability was driving Nokia's surprisingly positive financial results.
As it happens, Nokia CEO Stephen Elop was of the same mind as many investors: uncertainty surrounding NSN needed to be addressed. The move to bring NSN in-house should help appease shareholders, and given yesterday's bump in Nokia's share price, it appears it has. Acquiring the balance of the NSN joint venture also serves another important function: It gives Nokia some much-needed financial stability.
Let's make a deal
For a business unit that generated nearly half Nokia's 2013 Q1 revenue, the $2.23 billion it's paying for the balance of NSN seems awfully reasonable. Of the $2.23 billion, Nokia will cough up about $1.57 billion of that at closing -- expected in Q3 of this year -- with the balance due in a year and financed by a secured loan from Siemens.
Though Nokia has the cash on hand to pay for NSN outright, it has already "obtained committed bank financing" for the initial $1.57 billion payment. Using debt to finance the deal may seem counterintuitive with ample cash on the balance sheet, but liquidity is at a premium as Nokia continues its turnaround efforts in the smartphone marketplace.
Not surprisingly, with the positive results NSN has achieved lately, Elop intends to keep the unit's management team and its emphasis on the growing LTE market intact. The people and LTE solutions NSN brings to the table will be a valuable addition to Nokia, financially and for its revenue diversification. About the only change planned is the name; NSN will become Nokia Networks after the transaction closes.
The impact
In addition to the positive investor response to the NSN news, some analysts are rethinking their outlook on Nokia, including J.P. Morgan. An analyst with J.P. Morgan recently upgraded Nokia from underweight to overweight, skipping the equivalent of hold altogether. Coupled with some promising news coming from its partnership with Microsoft (MSFT 2.44%) and its Windows phone OS, Nokia bulls have some reasons to get excited.
Though Nokia has numerous alternatives to offer customers in the hyper-competitive smartphone market, there's no denying the high-end Lumia phones running Windows phone OS are a big part of Elop's strategic plans. The good news is that the Nokia/Microsoft arrangement is beginning to pay off.
Nokia isn't the only smartphone maker running Windows phone OS, but it's the biggest by a wide margin. According to a Windows Phone developer blog, 80% of Windows phones sold globally are Nokia devices, led by its flagship Lumia 920. And news that Windows phone OS took over the No. 3 spot in Q1 of 2013 was as good for Nokia as it was for Microsoft.
The new Nokia Networks has the potential to accomplish a lot more than just drive positive quarterly results for Nokia. The soon-to-be former NSN will give Nokia and its shareholders what they need most: Time and the financial wherewithal to build on the small but steady successes in smartphones.
