With Nokia Siemens Networks (NSN) doing well, one of its parent companies, Siemens (SI), may be looking to reduce its stake in the joint venture or exit it completely. The German engineering company had announced its intentions to sell off some of its non-core businesses in November, and with a six-year old shareholder agreement between Nokia (NOK) and Siemens coming to an end in April, speculations are rife about a possible stake sale in NSN. According to the Financial Times, Siemens could be looking to cut its 50% stake to as much as 20% or even lower.  Both companies had previously tried to sell NSN in 2011, but talks with private equity groups didn’t materialize. Now, with the joint venture back on its feet with four consecutive quarters of free cash flows, those talks seem to be back.
Rumors undervalue NSN …
However, it is not yet clear if Nokia is also interested in these talks considering that it manages NSN’s operations and has more than just a financial interest in the JV. According to our estimates, NSN contributes more than a third of Nokia’s fair value which means that Nokia’s half of the joint venture is worth a little over $6 billion, excluding cash. However, rumors put NSN’s enterprise value at only about 5 billion Euros ($6.6 billion). If true, Nokia will be able to realize only about half of what we believe is NSN’s fair value if it chooses to sell all of its stake in NSN.
It may be true that Nokia’s core handset business has been wilting under the constant assault of Apple (AAPL) and Samsung’s (OTCPK:SSNLF) smartphones, and it is uncertain how long the Lumia Windows Phones will be able to sustain demand in this highly competitive market. But considering that NSN has been performing well of late, executing on its LTE plans and consistently generating cash, we do not think it is likely that Nokia will look to sell its stake in NSN at such a low valuation. Moreover, with about $14 billion in reserves, Nokia doesn’t seem to be in dire need of cash in the near term. It could however be possible that Nokia is looking to buy out a portion of Siemens’ stake at a low valuation, which could be a good move by the Finns.
Over the past year, Nokia Siemens Networks has shown signs of turning the corner as a result of an ongoing restructuring that has not only helped operating margins improve, but also restored focus on its wireless business. As a result, NSN has fast emerged as the leader in the ongoing 4G LTE transition around the world and is taking share away from competitors. As of Q3 2012, NSN had succeeded in increasing its market share to about 20% share of the wireless infrastructure industry, only 2% behind #2 player, Huawei.  It now expects to reclaim its #2 spot behind Ericsson (ERIC) by the end of 2013.
Apart from revenue share gains, NSN is also benefiting from a streamlining of operations and the ongoing job cuts. By the end of 2013, NSN aims to cut around 17,000 jobs and achieve a total of 1 billion euros in savings as part of the restructuring initiative announced in late 2011. Simultaneously, NSN has been selling off non-core assets and increasing focus on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market. As a result of the reshuffle, NSN has performed really well in 2012, returning to operating profitability in the last two quarters of the year. As a result, we estimate NSN’s EBITDA margins in 2012 to have doubled over the previous year. This is a big positive sign that the company’s cost-cutting initiatives are taking hold. The division has also generated positive cash flows for four straight quarters now, and we expect this to sustain in the coming quarters as well.
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