Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has agreed to buy Siemens stake in a six year venture for 1.7 billion euros ($2.2 billion) under which Nokia is authorized for the entire cash flow, at a price that is below expectations.
Purchase Price less than expected
Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) shares surged 10 percent in Helsinki trading after the news. Hannu Rauhala, a Helsinki-based analyst at Pohjola Bank valued the purchase at 5 billion euros, which is well above the valued purchase price of 3.4 billion euros.
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A win-win for both
Siemens want to give greater attention to segments like energy equipment, healthcare and infrastructure projects and wants to stop wireless gear manufacturing business.
“With this transaction, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) buys itself a future, whatever happens in smartphones and feature phones,” said Pierre Ferragu, an analyst at Sanford C. Bernstein in London.
Nokia Siemens was Struggling
Nokia Siemens has been in losses and struggling for recovery in the wake of economic downturn and excessive competition. The company was formed in 2007 and started to sell non-core business units and slashed the jobs.
Nokia Siemens has sold units providing network equipment for wired networks. The joint venture has also stopped its WiMax segment that was trying hard to get some market share in the 4G LTE market.
The business support system of Nokia Siemens network assisted in the billing and charging systems in the telecommunication companies. Nokia Siemens Network initiated conversation with other companies to sell off its business support system.
Other points in the agreement
Both the companies said in a press release that Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will pay 1.2 billion Euros and acquire 50 percent share in Nokia Siemens Networks. The remaining will be given as secured loans from Siemens after a year of completion the deal.
The management and governance structure of the unit will remain same as per the plan of Nokia. Rajiv Suri will be the CEO, and Executive Chairman will be Jesper Ovesen of the Nokia Siemens Board of Directors.
The headquarters of the Nokia Siemens will remain in Espoo, Finland and the company will continue to keep a strong hold in Germany along with its important site Munich. The management plan of the network will also be the same as per the strategy of Nokia. The restructuring plan will also not change.
Acquisition to support balance sheet
A report from Natixis doubts that the group will be able to regain enough market share to amortize the substantial fixed cost. The company is facing hurdles in its Smartphone Segment and thus it is expected that the company will be able to balance its balance sheet through this acquisition. The Finnish company estimate post-acquisition net cash position of €2/2.5 billion, which according to report “is relatively little considering its cash consumption.”