Two weeks ago, anonymous reports said Nokia (NYSE:NOK) was about to find a new home for its mapping services. Upon further analysis, the whole idea made plenty of sense. "Nokia HERE is most likely moving to Germany for a song," I noted at the time. "Nokia will pocket that pittance and be happy to see the division go."
Well, now the rumor has become a solid piece of news. As expected, a trio of German automakers pooled their funds to buy Nokia HERE for $3.1 billion. That's $2.7 billion in cash, exactly as reported in July, plus $400 million of Nokia HERE landing on the new consortium's shoulders.
The deal is expected to close in the first quarter of 2016, when Audi, Daimler, and BMW take over the mapping service's operations. Nokia will book a $1.1 billion gain on the transaction, which means the unit was sold at roughly 1.8 times its current book value.
The accounting gain quickly turns into red ink from a historical perspective, of course. Nokia paid $8.1 billion for mapping service Navteq eight years ago, which then evolved into what we know as Nokia HERE today. In short, Nokia burned about $5 billion on its map-service experiment.
Nokia HERE showed an 8.3% operating margin on about $607 million in sales across the last two quarters. In the recently reported second quarter, HERE revenues rose 25% year over year while Nokia as a whole lifted sales by only 9%. As self-driving cars start to emerge into the mainstream and the Internet of Things presents another high-growth market for strong mapping data, it may seem strange that Nokia would unload this profitable and strongly growing division right now.
As for Nokia HERE's future, I'm sure we'll see a mixture of continued growth and infighting between the three joint owners. But I'm not here to dissect how BMW or Audi will use their new mapping asset. This is all about Nokia's motivations and the future of the Finnish tech giant.
The HERE sale makes more sense when you look at Nokia's cash flow statements. The company generated $785 million of free cash flows in the second quarter of 2014. In 2015, Nokia burned $381 million instead. All told, the balance sheet contains $4.4 billion of cash equivalents today, down from $7.3 billion a year ago. Meanwhile, long-term debt has grown 10% and now stands at $3.0 billion.
Brace yourselves. A cash crunch is coming.
What's on the horizon
In short, Nokia is happy to trade in the promise of future growth against a quick cash infusion. The Nokia Networks division, which accounts for 85% of Nokia's total sales today, could use a larger cash cushion while getting its ducks in a row. There's another wave of massive wireless network installations on the horizon, driven by 5G wireless technologies and a global thirst for mobile broadband services. That's why Nokia is doubling down on its network operations, including an all-stock merger with hardware vendor Alcatel-Lucent (UNKNOWN:ALU.DL).
But that business will never fall into Nokia's lap if the company isn't in business when the wave actually breaks. That could take a couple of years and Nokia doesn't have the luxury of simply waiting for it. The board of directors has paused Nokia's dividend and buyback policies until further notice. This sale is simply another step in the same emergency cash-preservation action.
Nokia really doesn't have a ton of other options right now. Additional debt is not exactly easy or cheap to come by in Europe these days, and the Alcatel merger will already strain Nokia investors' patience with dilution from freshly printed stock certificates. What remains, besides looking for change under the couch pillows? Let's start with selling a small business unit that isn't vital to the Nokia Networks mission.
The epic struggle for survival continues, given another shot at long-term success by a desperate asset sale. Hold on long enough -- or buy in when Nokia shares hit rock bottom if you think you can time it -- and Nokia might reward risk-embracing investors in the long run. Or not, because the cash-crunch risks are very real.
That's why they call it "risk," you know.