According to a Dow Jones article by Dana Cimilluca and Eyk Henning, Siemens has started exploring interest levels from private equity firms for its 50% stake in NSN. The article also points to Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) possibly considering sale (although less likely) of its stake to Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) . The initial agreement between Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and Siemens for NSN ran its course in April 2013, with the new agreement providing more flexibility to both parties to look at options to monetize the asset going forward.

Nokia Corporation

The article suggests that things have started to move now at both Nokia and Siemens in terms of the ownership structure for NSN especially given Nokia’s handset business remains in the midst of a turnaround with sales under pressure and seeing underlying FCF burn.

Kulbinder Garcha of Credit Suisse summarized his view on the NSN options.

Option 1 – IPO NSN; this seems best option for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)

If we were to assume an EV/sales of 0.6x for NSN, this would imply an EV range of €7.1bn to €7.5bn based on our 2013/2014 sales estimate. Suppose this is done in blocks of let us say 20% each in year 2014/2015 (with rest 60% in outer years), this could add total of €1.3bn of cash to Nokia’s balance sheet over 2014/2015. It would propel Nokia’s (excl. NSN) cash position from gross/net cash of €4.1bn/€1.5bn in 2015 (under status quo scenario) to around €5.5bn/€2.8bn (in the event of a total of 40% of NSN being IPO’ed over 2014/2015 with the rest being done in outer years). This would provide Nokia with much higher level of financial flexibility especially in a scenario if its D&S business were to continue to lose money leading to further restructuring efforts.


Option 2 – Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)  Buying Siemens’ stake is also a viable option and brings FCF benefits

Another option for Nokia could be to take full ownership of NSN by buying Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE)’ 50% stake in the JV. With agreement between both parties having expired in April 2013, and a new agreement in place now, we believe Siemens could actually turn out to be a willing seller. While this would provide Nokia with liquidity cushion in the near term (as NSN is likely to continue to see strong FCF generation), for Siemens this would take away risks around continued execution at JV, and level of investor appetite and valuation in the event of an IPO for NSN. In fact, in March 2013, Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) CFO again hinted that they are still looking at options to divest their stake in NSN specifically noting that: “This is not a business that we have any aspirations to stay. We have been divesting of it six years ago. In the way we have been doing it, it went more bumpy than we thought.… ….and I do believe that 2013 will be the time for Siemens to help NSN to move to a better place.”


If Siemens is willing to accept a lower valuation for NSN (let us assume 0.40x EV/sales on our 2014 estimate vs. 0.60x we assume in an IPO scenario but the IPO is done in parts over the next few years and valuation multiple declines over time), then this is something which Nokia could consider. In this situation, Nokia will have to pay €2.35bn to Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) to acquire full ownership of NSN. One of the biggest benefits for Nokia to enter into such a deal would be that at the group level, it would offset the ongoing cash burn in its core business with NSN generating strong FCF, and also allow unrestricted access to NSN’s cash (which is not the case currently). Overall on our assumptions, such a deal whereby Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) acquires the whole of NSN could offer the group even higher level of financial flexibility (gross cash in this scenario rising to €6.7bn in 2015, compared to our estimate of €5.5bn in our IPO scenario).

However, the negatives of such a transaction is that it would mainly be done for financial purposes as opposed to any strategic reasons, and may come with risks of management distraction for existing Nokia executives and potential management turnover at NSN. Also, at some point, Nokia may still need to look at the IPO option once it sees some stability in D&S.