Finnish handset manufacturer Nokia Corporation (NOK - Analyst Report) has reached a deal to purchase Siemens AG’s stake in Nokia-Siemens Network (NSN). Notably, the existing agreement between Nokia and Siemens – Nokia’s telecom equipment joint venture partner – for NSN will come to an end in 2013.
Per the agreement, Nokia will pay €1.2 billion ($1.5 billion) in cash and the remaining €500 million ($647 million) will be paid in a secured loan from Siemens after one year from the closing of the transaction. Nokia will take a bridge loan to finance the deal. Both Nokia and Siemens expect to complete the deal in the third quarter of 2013, subject to customary regulatory approvals.
After completing six years of partnership, both the companies have been trying to exit the business, particularly Siemens. As per media reports, the German giant held talks with private equity firms to offload its stake in the equipment vendor and concentrate on its core engineering business.
Formed in 2007 as a 50-50 joint venture between Nokia and Siemens, NSN is the third-largest global telecom equipment gear maker. Despite the reputation, it was only in the third quarter of 2012 that NSN achieved its first operational profitability.
Though NSN boasts a strong GSM portfolio, it has struggled on the CDMA front, which is the most dominant network protocol in North America. Moreover, Chinese vendors like ZTE and Huawei Technologies are offering stiff competition to the company by offering lower bids for network infrastructure contracts.
In an attempt to combat the difficult situation, NSN is reducing its operating cost by retrenching employees and selling its non-core business units. NSN plans to lay off 17,000 or 23% of its work force and expects the restructuring to result in an annual cost reduction of approximately $1.35 billion by 2013.
The restructuring is paying off as the company has considerably improved its operational performances and has reported operating profits in the last three quarters. According to IDC, NSN has become the second most dominant LTE (Long Tern Evolution) vendor in the world, behind Ericsson (ERIC - Analyst Report).
We believe that the deal will create certain synergies for Nokia as the company aims to grab the lucrative 2nd position in the telecom equipment market and create sustainable long-term value for its shareholders. Additionally, acquiring the 50% stake will allow Nokia to compensate its falling handset business somewhat.
However, at the end of 1Q13, Nokia had $7.28 billion of outstanding debt. Further debt would not only increase Nokia’s debt position but will also affect its rating, as the company’s debt currently has a junk status with the three main rating companies.
Currently, Nokia carries a Zacks Rank #3 (Hold). Among the other companies in the industry, Ubiquiti Networks (UBNT - Analyst Report) with a Zacks Rank #1 (Strong Buy) is worth considering.