Nokia (NYSE:NOK) is selling its entire devices & services segment to Microsoft (NASDAQ:MSFT) for approximately $7.2 billion. This acquisition will totally transform both companies by changing their business models. Going forward, Nokia will focus on NSN, HERE, and its Advanced Technologies segment.
Microsoft has agreed to pay around $6.01 billion for Nokia’s devices segment and $2.62 billion for other patented technologies. During yesterday’s conference call, Nokia ensured investors that the patent portfolio and cheap technology office organization will stay with the company. Microsoft will get a 10-year access to Nokia’s patents and Nokia will get a reciprocal access to Microsoft’s HERE patent technologies.
If this transaction is approved, Nokia as an investment will be totally transformed. The company was previously operating in a rapidly evolving, competitive, and highly risky smartphone industry. Such rapid evolution ensures there are considerable risks associated with any investments in this arena. Total control over NSN and sales of devices segment will transform Nokia’s risk profile. The new Nokia will have pretty much the same business model as Ericsson (NASDAQ:ERIC). Going forward, Nokia investors should expect the following changes:
Nokia will now primarily be a telecom vendor with some interest in location services with HERE. NSN is now the core business of Nokia, provided the company doesn’t make a significant investment or acquisition to diversify into a new arena.
After this deal, Nokia will retain its 10,000 patents and benefit from the considerable licensing potential of these patents. During the conference call after the announcement, management hinted that they expect top-line growth from this segment.
Also, Nokia will now focus on its HERE segment and look for more growth opportunities. This segment currently generates approximately $140 million in revenues, and after this deal this figure will go up. This is because Microsoft will become a strategic licensee of the HERE platform. This will ensure a separate payment for a four-year license, in addition to the internal revenue stream HERE generates from the devices and service business.
Margins: Nokia’s reported poor margins due to the unsatisfactory performance of the devices segment. According to Nokia, the Pro-forma operating margin in the first half would have been 12.1%; much higher to previously published non-IFRS operating margin of 4.2%. This margin expansion is driven by the elimination of devices segment losses.
Dividends: Due to cash flow issues, Nokia stopped paying a dividend in January 2013. With the cash coming in from this sale and the improving OCF (Operating Cash Flow) situation, I feel its dividend program will most likely be reinstated. Also, I feel there is a strong possibility that Nokia will pay a one-off special dividend. Management has not denied the possibility of a special dividend and has shown intentions to return this benefit to shareholders; however, it has not specified how they will accomplish this task.
If both deals were completed as the previous quarter ended, the company would have ended the quarter with gross cash of 14.9 billion euros and net cash of 7.8 billion euros. This compares favorably to the reported net cash of around 4.1 billion euros. Nokia was previously paying a dividend yield of around 4%-5%; investors could now expect something in the area of 2%-3%, in line with a 2.6% dividend yield of Ericsson. The market is expecting Ericsson to post revenues of around $36 billion next year with EPS of $0.89. These estimates reflect a growth rate of merely 4%, which can be a sign of worry for the industry.
A new Nokia will emerge if this deal is approved by the board. A company engaged in the less risky and more mature network equipment and services business. It will also focus more on maximizing the utility of its vast patent portfolio and location services. The company is transforming from a highly speculative smartphone industry investment to a more stable dividend play. Also, I feel it is highly likely that Nokia will announce a special dividend or resumption of dividend payments. This announcement will positively impact the share price and offers a short term investment opportunity for investors.
Muhammad Saeed has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!