Nokia (NOK) is currently facing a dilemma -- mostly people are familiar with the mobile phone business of the company. However, Nokia has telecom equipment business known as Nokia Siemens, a joint venture between Nokia and Siemens (SI). The company has 50% stake in the venture, and currently, it is pondering whether to sell its stake or buyout Siemens' stake in the venture. Recently, the pact between the companies has expired, and parties are now free to sell their stake in the venture without consulting each other.
Nokia's mobile phone business is suffering at the moment, and it is expected to grow at a low rate in the short term. However, Nokia Siemens have recently turned into a contributor towards the cash flows of the company, that's where the dilemma lies -- should the company sell its stake and take the cash for the mobile business, or should it buyout Siemens and strengthen future cash flows? Let's look at the options.
What Should Nokia Do With Nokia Siemens?
Nokia Siemens is valued between $7.75 billion and $13 billion. The venture had been suffering due to a decrease in the demand for networking equipment and competition from Ericsson (ERIC) and Asian manufacturers. However, recently, the venture has been able to increase its margins. It has also affected Nokia's overall margins, and somewhat cushioned the decline in margins from the company's mobile phone business.
Nokia has three options: first, buy Siemens' stake in the venture and take full control of the networking business. However, based on current valuation of the venture, Nokia will have trouble paying for Siemens' stake. The company is facing its own cash troubles and it would like to keep cash in order to support its mobile phone business. Another way to fund the transaction can be a mix of debt and equity issue. At the moment, issuing equity will not be an attractive option due to the distressed stock price. On the other hand, long-term debt of the company stands at $6.57 billion -- a mixture of debt and existing cash reserves can be used to carry out the transaction.
Second option for the company is a joint buyout of Siemens' stake. Nokia has already held talks with Alcatel-Lucent (ALU) about buying Siemens stake in the venture -- so, this option looks the most likely. Nokia wants to control the networking equipment business as it can support its ailing mobile devices segment. However, the company does not have the cash to carry the transaction on its own. The best option at the moment for Nokia is a joint bid for the Siemens' stake.
Third option is the sale of Nokia's stake, which in my opinion, should not be availed. At the moment, networking equipment business is the best performing segment for the company -- it would not be wise to get rid of the best component when devices segment is performing poorly. In my opinion, Nokia should increase its stake in the joint venture instead of selling it.
Devices Segment Moving Towards High Margin Areas?
Overall sales distribution for the last year was interesting from the company's mobile devices segment. China, India, the Middle East and Africa are known to be the biggest markets for Nokia -- however, all of these regions recorded a decline in sales during the last year. On the other hand, Nokia was able to grow sales in North America by 28%, the only region showing growth. An interesting thing to note here is that sales volume for North America actually came down to 2.2 million units from 3.9 million units in 2011. This clearly indicates that the company was able to sell more of its high-end products in North America, which resulted in higher sales despite lower volumes. It is an encouraging sign for Nokia that North American customers are welcoming high-end products from the company.
Sales were mainly affected due to a lack of variety in its smartphone line. However, now the company has a diverse portfolio of touch screen smartphones, which will cater to a large set of customers. Average selling price in smartphones is also encouraging for the company as it is able to get a higher ASP for its smartphones. Furthermore, Nokia's cheaper smartphones are recapturing some of the lost market share in China and India -- I expect a substantial recovery in Asia and Africa.
It is clear that there is some recovery in the company's mobile devices segment. However, it will take some time for Nokia to make this segment profitable again. Meanwhile, Nokia Siemens can be a good support for the company. Nokia is an attractive bet at the moment. In my opinion, the stock is undervalued and the market is ignoring the value of Nokia Siemens due to the poor performance of its mobile devices segment. If Nokia increases its stake in the venture, it will be able to increase its cash flows in the short term as well as long term. Recovering mobile devices segment and increased cash flows from the networking equipment business should allow the company to post impressive numbers during the current year. As a result, I expect a considerable recovery in the stock price over the next 12 months.