Microsoft deal puts Nokia on Ericsson's networking solutions path

With the $7.2 billion sale of its mobile-phone business to Microsoft Corp., Nokia Oyj is following a path trodden by Ericsson AB of Sweden in abandoning handset manufacturing to chase networking-equipment profits.

Nokia Solutions and Networks, the $18 billion-a-year business Nokia fully took over from Siemens AG last month, will account for more than 90 percent of sales at Espoo, Finland-based Nokia after the company exits phones. As the stock surged 34 percent yesterday, Nokia’s enterprise value jumped to 0.48 times the remaining businesses’ revenue, compared with 1.03 times for Ericsson, data compiled by Bloomberg shows.

“The new Nokia isn’t sexy and won’t have spectacular growth, but it won’t suffer from spectacular failures either,” Daniel Lacalle, a senior portfolio manager at Ecofin Ltd. in London. “Nokia will be much more competitive as it won’t waste money anymore.”

Nokia, struggling to regain relevance in smartphones after Apple Inc.’s iPhone was introduced in 2007, is getting out of the business almost a decade after Nordic rival Ericsson split off mobile phones into a separate venture with Sony Corp. The Swedish company also shed more than half of its workforce, helping it emerge from its worst crisis. Nokia’s networks unit, NSN, has only just returned to profit after accumulating billions of dollars in operating losses over six years.

Employee Transfer

Under the all-cash agreement announced this week, Redmond, Washington-based Microsoft will pay 3.79 billion euros ($5 billion) for Nokia’s devices and services division -- which includes the Lumia smartphone line as well as more basic handsets -- and 1.65 billion euros to license Nokia’s patents. Microsoft will also make 1.5 billion euros in financing available to Nokia via convertible bonds.

About 32,000 employees -- of whom 4,700 are in Finland -- will transfer to Microsoft, and Nokia Chief Executive Officer Stephen Elop will return to Microsoft after a three-year stint running the Finnish manufacturer.

NSN, under CEO Rajeev Suri, has cut more than 20,000 jobs amid declining sales and intensifying competition with Chinese suppliers Huawei Technologies Co. and ZTE Corp. Nokia, Ericsson and Alcatel-Lucent (ALU) SA are now vying for contracts from wireless operators as they upgrade networks using fourth-generation technology to cope with data-hungry tablets and smartphones to browse the Web.

Alcatel Speculation

“4G is a high-margin business right now because there’s a new patented technology, and with only a few players offering it,” said Mikko Ervasti, an analyst at Evli Bank Oyj in Helsinki. “Those who want it now have to pay the market price which is quite nice at the moment.”

Alcatel-Lucent, under new CEO Michel Combes, in July reported sales and earnings excluding reorganization costs that topped analysts’ estimate. Combes has pledged to sell assets to raise 1 billion euros and reduce expenses at the Paris-based company by another 1 billion euros.

Shares of Alcatel-Lucent fell 0.2 percent at 11:55 a.m. in Paris, after jumping 9.2 percent yesterday. Speculation that Nokia, which will have more financial leeway after the Microsoft deal, could bid for its assets will probably push the stock higher, Oddo & Cie analysts said in a note.

An acquisition of Alcatel-Lucent’s wireless unit would make NSN stronger in the U.S. as it has more customers in the country, Natixis Securities analysts said in a note.

James Etheridge, a Nokia spokesman, declined to comment.

‘Value Creation’

“NSN is a very, very efficient enterprise and can invest in a prudent way, in the right way to grow,” Nokia Chief Financial Officer Timo Ihamuotila, who was also named interim president, said during a conference call yesterday. “We believe that we should invest in growth, but it has to be done in a smart way. And of course, thinking about value creation.”

He wouldn’t discuss any potential consolidation scenarios on the call.
Nokia traded 0.8 percent higher at 4 euros in Helsinki.

NSN, formerly called Nokia Siemens Networks, had about 50,000 workers at the end of June. Based on 2012 reported revenue, its sales per employee were $313,500, ahead of Ericsson’s $305,000 and Alcatel-Lucent’s $257,000, according to data compiled by Bloomberg.

“The Nokia that exits this transaction will continue to be a big company,” Ihamuotila told Bloomberg Television in an interview. “It will have an improved earnings profile.”

Siemens Buyout

In the first half, NSN reported an operating profit of 11 million euros, and on an adjusted basis the figure was 524 million euros. That helped to offset losses at the handset business.

NSN is the most recent technology venture in Europe to unravel -- with Nokia agreeing to buy out Siemens’s half share for 1.7 billion euros in July.

Ericsson last year completed the sale of its share in the handset venture to Sony. Ericsson and STMicroelectronics SA this year split up their unprofitable chipmaking venture ST-Ericsson.

Nokia’s change in focus marks another shift for a company which started as a wood-pulp mill in southwestern Finland in 1865. It was from the second mill on the banks of the Nokianvirta river that Nokia derived its name.

After the 1967 merger with Finnish Cable Works and Finnish Rubber Works, Nokia’s five divisions comprised rubber, cable, forestry, electronics and power generation, and in 1979 it entered the mobile telephony sphere for the first time in a joint venture with Finnish TV maker Salora.

Nokia’s smartphone shipments have fallen by almost two-thirds since a 2010 peak of 104 million units, as it lost market share to Apple Inc.’s iPhone and Google Inc.’s Android platform, according to data compiled by Bloomberg Industries. That has eroded cash flow, prompting Nokia to skip a dividend payment for the first time in at least 143 years.

“The future for NSN is quite solid,” said Hannu Rauhala, a Helsinki-based analyst at Pohjola Bank who rates Nokia shares reduce. It “will benefit from new, faster services such as 4G rollouts. Opportunities for network and equipment suppliers around the world are big.”