Just when we thought Nokia-Siemens Networks (NYSE:NOK) (SI) had a successful year, it looks like Siemens wants to get out of this partnership. The two companies each own 50% of this joint venture and Siemens' exit might impact a lot of things in the business unit. Some reports suggest that Nokia will buy the Siemens' shares in the joint venture while others suggest that Alcatel-Lucent (ALU) will buy these shares. In either case, Siemens will not be part of the equation anymore. There might be a decision before April when shareholder renewal deadline for Nokia Siemens Networks occurs, which means the next few months will be very busy for the joint venture.
In the last year, Nokia Siemens Networks has been a large part of Nokia's cost cutting strategy because the business segment has been where 60% of Nokia's employees worked at. The company wanted to move its focus on mobile broadband technologies while cutting employees from business units not directly related to these technologies. In the fourth quarter of 2012, Nokia Siemens Networks was Nokia's most profitable part as it reported all-time high profit margins.
After cutting 17,000 employees, Nokia Siemens Networks ended 2012 in profit. Two years ago, Nokia and Siemens each had to contribute $650 million into the venture because it wasn't profitable. Today, Nokia Siemens Networks will not only be self sufficient, but it will also be able to finance the operations in the rest of Nokia as long as it can keep its profit margins similar to those in 2012. Many countries are upgrading their mobile networks in order to provide a better service for their citizens and Nokia Siemens Networks is one of the largest companies that build and maintain mobile networks internationally.
Once Siemens exits the joint venture Nokia could spin off the company with an IPO and use the fresh cash to finance its turnaround. I don't think this is going to happen because Stephen Elop truly believes in the Nokia Siemens Networks and he wants Nokia to keep owning at least a part of the business segment. Nokia currently has 3 business segments: Nokia Siemens Networks, mobile devices and locations (Nokia maps and GPS). If Nokia were to sell all its businesses except for the mobile devices, it would be in a risky position because the company's portfolio would not be diversified enough. In the last two quarters of 2012, the company's mobile devices segment was not profitable while the other two segments were profitable, which kept the company in the green zone. While Nokia should stay focused and not try too many things at once, it should also have a product portfolio that's sufficiently diversified in order to keep the company profitable if one of the business segments isn't performing that well. Nokia has a lot of expertise in mobile networks along with many patents, and the company should hold onto these assets for now. I am sure Stephen Elop is in agreement with me in this, because he had a lot of encouraging things to say about Nokia Siemens Networks during the last quarterly earnings call. If Nokia spins this business segment off as a separate company, this might mean that the rest of Nokia is also up for sale. I am sure many companies including but not limited to Microsoft would like to get their hands on Nokia's mobile devices segment which has the reputation to build the highest quality phones in the world, along with having a massive portfolio of patents.
Analysts believe that Nokia Siemens Networks is worth about $13.4 billion. Basically, Nokia's share in the company (50%) is worth $6.7 billion. If and when Siemens sells its share in the joint venture, it may have trouble finding a buyer for $6.7 billion. Not many companies have this kind of money, and Nokia would have to sell debt to buy the shares of Siemens. For a company like Alcatel-Lucent, the move might be too risky because the company is already bleeding cash, and losing money in a way threatening the company's very existence. Buying half of Nokia Siemens Networks not only means spending nearly $7 billion dollars, but also adding about 30,000 employees to the workforce. I don't think many companies would be very excited about this. At the end of the day, Nokia might just end up buying the shares of Siemens and owning the entire company. Now that NSN is profitable, Nokia won't have too much trouble issuing some debt for it in case this is needed.
Some readers might ask a very crucial question: if joint venture is doing so well, why does Siemens want to exit from it? Siemens has a giant portfolio of products and services and many people in the company feel like it lost its focus. In order to focus on more priority areas, Siemens is exiting from a number of products and services that it sees as "non-core." Siemens has never been that enthusiastic about Nokia Siemens Networks and Nokia has been pretty much running the company up until now. I wouldn't be surprised if Siemens was to let go of its shares in NSN for a discount. If Siemens isn't able to find a buyer for its shares until the deadline in April, it might have to hold onto these shares for a while. I'm sure that many people in Siemens believe that this is the perfect time to sell its shares in the joint venture as the business segment successfully went through a restructuring and proved to the world that it will continue to be a major player in mobile networks.
The best case scenario for Nokia would involve Nokia and Siemens coming to terms where Nokia buys out Siemens' shares but there is a long-term payment plan where Nokia doesn't have to pay the price all at once. Then Nokia could use NSN's current positive cash flow to finance the buyout. The worst case scenario involves a third party buying Siemens' assets and attempting to have a say in running the company. On a side note, Nokia Siemens Networks is getting ready to raise $930 million in new debt.
Future for NSN looks promising because almost every country in the world is upgrading its mobile networks to the next level and there are hundreds of operators in the world that conduct business with NSN. The biggest threat in front of NSN is the low-cost Chinese companies, however, many companies in the western world don't trust Chinese companies and Nokia already has ongoing contracts with most of the major companies. Many companies in the western world see Nokia's quality as something that's worth paying premium for.
For the time being, Nokia investors don't have much to worry about regarding Siemens' exit from the joint venture of Nokia Siemens Networks.
Disclosure: I am long NOK, SI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.