This morning, Nokia (NOK) shareholders took our their knuckle dusters and apparently mugged the desperate old Siemens (SI) shareholders out of value. The amusing part being that both sides of the fence have taken this as good news!
A recap for those who haven't looked at the news, Nokia purchased the Siemens portion of Nokia Siemens Networks for EUR1.7bn, using EUR1.2bn in cash with EUR500m to be paid one year from the 3Q13 completion (using debt).
Putting this into perspective, the book value of Siemens equity stake stood at EUR1,425m meaning that Nokia effectively bought the remainder of NSN at 1.2x book value! If we assume that this price is a fair representation for the company, what does this mean when compared to peers?
First I will assume YoY stay relatively flat at EUR13.3bn while EBITDA increased from EUR1,409BN to EUR1,629bn (14% growth YoY). Then I will assume that EUR1.7bn is the fair price meaning that NSN Equity value is EUR3.4bn and enterprise value is EUR2.06bn (business has more cash than debt).
To be fair, I am rather bullish in my EBITDA estimates for NSN going forward as consensus EBITDA for Ericsson is for a slight decline (Alcatel is nearly doubling due to their restructuring) and assuming a similar EBITDA decline for Nokia Siemens Networks, my EV/EBITDA13 only reaches 1.98x.
Cutting a long story short, the numbers imply that Siemens have let go of their asset way too cheaply. Even the most bearish analysts had an equity value of circa EUR6bn meaning that today, bulls and bears are united in their belief that Nokia has indeed made an astute investment.
Being the only supplier of free cash flow in the Nokia umbrella means that Nokia have effectively got a cash cow (albeit rather ill) to fund their more risky Devices & Services business.
Why did Siemens let this stock go so cheaply?
In November, CEO Peter Loscher began a restructuring process for Siemens involving exiting underperforming business lines and a raft of operational savings.
Being the minority shareholder, NSN was nothing more than an illiquid investment and one which hasn't yielded profit for a reasonable amount of time. Furthermore, considering Siemens' market cap is close to $100bn (Eur70bn), NSN is rather insignificant in the grand scheme of things. Like OSRAM, NSN became a bad use of capital for Siemens shareholders who are currently rewarding the company based on the speed of their restructuring. In the near term, this may be true, but fire selling a loss making asset that has only recently shown green shoots of recovery for a distressed price doesn't seem like a wise move.
In my opinion, Siemens management between a rock and a hard place. As the stake was silent in nature, Siemens were at the mercy of Nokia in terms of exit opportunities. No Private Equity funds would be interested in a deal involving only 50% of a company with no controlling stake and so the only options for Siemens was to sell to Nokia, hold the non-core asset (Siemens shareholders would oppose this) or to convince Nokia to spin the whole division off.
Even if Nokia wants to sell of the division in the long run they must have realised the difficult predicament that Siemens were in (as a semi forced seller) and by sounding to Siemens they weren't interest in selling, they effectively forced Siemens into handing over the business at a bargain rate.
For those looking forward towards next quarter's earnings I would advise you to pay close attention to the revenues as the number may be distorted by a one off accounting gain from the acquisition of the remaining NSN stake.
As if the above wasn't good news enough, JPM also upgraded their price target to $4.70 (EUR3.60) but unfortunately for Mr.Deshpande, the company decided to buy out NSN the same day, rendering part of his fantastic analysis obsolete. The benefit of the JPM note however, is the further evidence presented with the hope of bringing some institutional investors to the shareholding list.
All we need is for Lumia sales to increase +30% QoQ and it's going to be a great Summer for Nokia Shareholders.