$2.21B is the Cost of Nokia's Future

On June 14, 2013, I wrote that Siemens AG, the German multinational engineering and electronics conglomerate, was looking to see if private-equity firms would be interested in buying out its share of Nokia Corp. There was also talk that Nokia was exploring the possibility of buying Siemens’ 50 percent share of the joint venture.

Today, July 1, will be the day that Nokia announces it is buying out Siemens’ 50 percent stake. That means that as of today, Nokia, Finland’s multinational communications technology corporation (did you know that originally Nokia was a paper production plant!), takes complete ownership of Nokia Siemens Networks (NSN).

NSN sells telecommunications equipment to mobile phone carriers. This buyout will make Nokia a major player in supplying the infrastructure for mobile networks. Nokia's chief executive Stephen Elop mentioned that the network operations arms had strengthened its financial performance. He sees progress in high speed, principally LTE connections now being rolled out by network operators as an attractive growth opportunity for Nokia.

Analysts are saying that by acquiring the 50 percent stake in Nokia Siemens Networks that it does not already own, Nokia has secured ownership of a profitable business to prop up its balance sheet, as it continues efforts to turnaround its cell phone operations.

It is estimated that NSN’s revenue is roughly twice that of Nokia’s handset business. Between 1998 and 2012, Nokia was once the world’s largest vendor of mobile phone. Unfortunately, the past five years hit it hard, resulting in declining market share, losing out to Android and iPhones.

In a research note, Janardan Menon, a telecommunications analyst at Liberum Capital, wrote, “This increases the range of strategic options Nokia has in the future. Nokia is acquiring this asset at a very attractive price, well below what an I.P.O. or trade sale could bring in the future.”

Some of the terms of the deal are that Nokia would pay $1.57 billion to Siemens for the joint venture. It would also pay $653 million in the form of a secured loan from Siemens. The loan must be repaid one year after the transaction is completed which is slated to be completed during the third quarter of the year.

According to Elop, the company has no plan to integrate Nokia Siemens into its existing operations. The venture will remain a separate entity with its current management. He said, “As the deal is closed, we will continue to strengthen NSN as a more independent entity. As for the future for Nokia Siemens, we have consistently said that there are a range of options available. Economically, the transaction somewhat stands on its own. We felt that the purchase was very attractive for Nokia’s shareholders, its customers and its employees.”

Some investors have interpreted Elop’s comments to mean that Nokia may be prepared to sell all or part of the business to a single buyer or possibly to investors through initial public offerings. In the meantime, Nokia’s share price jumped by more than 8 percent in today’s trading. Shares of Siemens rose 2.2 percent in Frankfurt.