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NSN Buy Hurts Nokia's Credit Rating

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Nokia Corporation’s (NOK - Free Report) rating has been impacted following its proposed acquisition of Siemens AG’s stake in Nokia Siemens Network (NSN).  Standard and Poor’s (S&P) has downgraded the handset manufacturer’s long-term credit rating to B+ from BB-.

According to the rating agency, Nokia’s full control over NSN might weaken the company’s balance sheet. The revised rating signifies that Nokia holds an ‘aggressive’ financial risk profile and a ‘weak’ business risk profile. Nevertheless, S&P has affirmed Nokia’s ‘B’ short- term corporate credit rating along with a stable outlook.

Recently, Nokia reached a deal to purchase Siemens’ 50% stake in NSN for $2.2 billion, out of which $1.5 billion will be paid in cash and the remaining amount will be paid in a secured loan from Siemens after a year from the closing of the transaction. The deal is expected to close in the third quarter of 2013, subject to customary regulatory approvals.

Although formed in 2007, NSN achieved its operational profitability in the third quarter of 2012, as the company lacked severely on the CDMA front. However, of late, the equipment vendor has shown signs of improvement after restructuring its business including several rounds of job cuts.  The acquisition is expected to compensate its struggling handset business.

Meanwhile, S&P believes that the deal will not have much positive impact on Nokia’s profitability or cash flow measures but will affect its cash position. The Finnish giant countered S&P’s concerns by arguing that the deal will add significant value to Nokia’s shareholders.

The rating agency also remains sceptical about the cash flow generating ability of Nokia’s Device and Service segment and believes that the company’s free operating cash flow (FOCF) will be negative in the second half of 2013. However, S&P will raise Nokia’s rating if the company manages to generate a positive FOCF.

Despite facing significant market share loss to Apple Inc.’s (AAPL - Free Report) iPhone and other smartphones running on Google Inc.’s Android operating System, Nokia has been able to maintain its strong cash position. At the end of the first quarter of 2013, Nokia had approximately $5,917 million of cash and cash equivalents compared with $5,755 million at the end of 2012.

Currently, Nokia has close to $7 billion in debt, which remains a concern for the smartphone manufacturer. Though Nokia’s cash position remains promising, sliding market share along with negative cash flow might impact its rating in the future.

Currently, Nokia carries a Zacks Rank #3 (Hold).

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