Dan Loeb Q3 letter below (see Loeb Q2 here), the hedge fund has purchased Nokia. We will have more coverage shortly.
Equity Position: Nokia Corporation (“Nokia”)
We purchased Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) late in the third quarter following the announced sale of its Devices and Services (“D&S”) business to Microsoft Corporation (NASDAQ:MSFT) for €5.44 billion in an all-cash transaction. Expected to close in Q1 2014, the deal provides €3.8 billion for the D&S business and €1.6 billion for a 10-year non-exclusive patent licensing agreement. Once the transaction is complete, “new” Nokia will consist of the Nokia Siemens Networks (“NSN”), the HERE maps business, and a patent portfolio known as Advanced Technologies.
At our purchase price, we seized an opportunity to create new Nokia at a substantial discount to target value. The company will have approximately €8 billion of net cash when the transaction closes, and we expect a meaningful portion of the excess will be distributed to shareholders in coming quarters. Either a buyback or a special dividend is possible, which should draw additional investors to new Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) when the cash return scenario develops following the deal closing.
Nokia’s strategic and operational profile
The de facto spin of the D&S business leaves Nokia with a significantly different strategic and operational profile, with 40% of today’s market capitalization reflected in pro forma net cash and a portfolio of three distinct businesses each generating positive free cash flow. Each of Nokia’s businesses has interesting opportunities and dynamics. In the case of NSN, years of restructuring have resulted in a more profitable business, while the market structure has improved following years of consolidation ahead of a global 4G upgrade cycle.
Having acquired Siemens’ 50% stake in NSN this summer at a very attractive valuation, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) now has greater control over the operating and strategic prospects for the Business. The HERE maps business has exceptional share in the built-in automotive navigation market (estimated at 80 – 90%) along with significant potential in portable navigation, an increasingly strategic area for smartphone vendors.
Nokia’s patent portfolio
The Advanced Technologies intellectual property licensing business has historically operated on a net basis in commercial agreements with other smartphone vendors. Going forward, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has the opportunity to realize royalty revenues on a gross basis and focus on a broader licensing program of its 10,000 patent families, which include leadership positions in 2G/3G/4G standard essential patents, as well as a broad array of non-standard essential patents. Nokia’s patent portfolio has been successfully defended in court and via settlement agreements over the years, enhancing its licensing prospects and strategic value.
For years, the investment case for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has centered on the prospects for the handset business with little emphasis on NSN, the maps business or the intellectual property licensing opportunity. We think the repositioning of the “new” Nokia story will take time for the broader investment community to absorb, which allows us to initiate the position at such a significant discount. Meanwhile, the prospect of a substantial one-time capital return and possible reinstatement of a regular dividend further enhance our upside potential. Nokia’s commitment to return excess capital and the attractive price paid for Siemens’ 50% stake in NSN suggest Nokia’s leadership will remain prudent in capital allocation decisions going forward.
Event-driven situations like the Nokia/Microsoft Corporation (NASDAQ:MSFT) transaction are the bread and butter of our strategy. We have recently seen an increase in the number of these opportunities and welcome the chance to populate the portfolio with them.
Loeb Q3 below also see- Dan Loeb’s Best Performing Positions In 2013