Nokia Siemens Networks is a joint venture of Nokia (NYSE:NOK) and Siemens (SI). A few months ago, the commitment agreement expired and both of the companies were free to do whatever they wanted with their part of the company. While Nokia owns 51% and Siemens owns 49% of the company, it is operated by Nokia, with all employees appearing on Nokia's payroll. A few months ago, when speculations regarding the future of the company started, I said that the most likely scenario was Nokia buying the rest of the company from Siemens, and Bloomberg reports that this is exactly what's happening.
Bloomberg reported that Nokia will pay Siemens $2.2 billion for its stake at the company, which is dirt cheap given that the company generated $17.90 billion in revenues and $1.01 billion in operating profits last year. Siemens had been wanting to get out of this partnership for a while because it wanted to focus on its core operations; therefore, the company allowed Nokia to acquire the rest of the joint venture at a discounted price.
While this will hurt Nokia's cash position in the short term, I am happy with Nokia's decision. For months, I kept saying that Nokia should buy the rest of Nokia Siemens Networks because this is a valuable part of the company. Now Nokia won't have to worry about Siemens (or another partner for that matter) and the company will be able to do whatever it wants with the NSN (which will probably get a new name after all is said and done).
I did not want Nokia to sell its stake in Nokia Siemens Networks because the company provides Nokia with another source of revenue when the mobile devices fail to deliver. Last year, when Nokia's mobile devices segment was suffering, Nokia Siemens Networks kept the company afloat.
Nokia Siemens Networks has a volatile history of revenue and earnings generation; however, things should look better for the company in the future. There is a huge demand from the developing nations to upgrade their existing networks and NSN is a well-known name in the industry. While some Chinese companies (like Huawei and ZTC) offer cheaper alternatives to NSN's products and services, many clients prefer quality over price. For example, the head of mobile networks at TIM Brasil, Marco di Costanzo, made an announcement about why he picked NSN over competition:
"Our long-term partnership with Nokia Siemens Networks has been excellent, and the 2G and 3G equipment installed by the company is performing so well that it was a natural decision to deploy an LTE network with the same vendor. We are confident that Nokia Siemens Networks will build a robust LTE network for us to launch ultra-fast 4G mobile broadband services to satisfy our customers."
Furthermore, Saran Phaloprakarn, vice president of Network Strategic Planning in the largest mobile phone network in Thailand said:
"Implementing a 3G network is very crucial for us. Nokia Siemens Networks has proven its expertise both technically and commercially throughout its partnership with AIS over the last 20 years. We needed a partner who understands our business, and could deploy and manage our network, enabling us to provide the best service to our growing customer base. Nokia Siemens Networks was the clear choice for us to roll out 3G services to the market."
In addition, Johan Andsjö, CEO of Orange Communications in Switzerland acknowledged NSN by saying:
"Therefore we are happy to have chosen Nokia Siemens Networks as our partner for the complete delivery of all build activities. With Nokia Siemens Networks we can count on an experienced, long lasting partner, with an existing team of high professionals, providing us and our customers with outstanding network quality."
The quality and dependability of Nokia Siemens Networks is well-acknowledged and well known in the industry. Many customers are willing to pay a premium for the services and products of this company. Last year, Nokia Siemens Networks was a part of a major restructuring program implemented by Nokia and it was able to cut its operating expenses by more than $500 million. Last year, the company cut its research and development costs by 6%, marketing expenses by 13% and administrative and general expenses by 8% compared to 2011. By the end of 2013, Nokia plans to cut its operating expenses by $3.9 billion in the overall company and $1.3 billion in Nokia Siemens Networks compared to 2011.
Nokia will use a bridge loan in order to pay for the purchase even though it has enough cash to cover the transaction. Bridge loans are usually utilized when companies take short-term borrowings while shopping around for longer-term plans. Nokia is likely to get a bridge loan for a few years. After this period, if the company is in a better financial shape, it could always pay off the loan rather than looking for a long-term loan.
I've been advocating for Nokia to buy the remaining shares of NSN for a long time and I mentioned it in several of my articles in the past. I think this is good news for the Nokia investors. If Nokia didn't keep NSN, it would lose an important aspect of its business model and it will have to rely on mobile devices alone to save itself. I never thought Nokia would make such a mistake, and I am happy about the company's decision. After all, I didn't expect Nokia to sell NSN after spending so much time, money and other resources to turn it around. I was expecting Nokia to end up spending more on buying NSN than $2.2 billion mentioned by Bloomberg. Thanks to the fact that Siemens doesn't want to do anything with NSN, Nokia got a cheap deal.
Disclosure: I am long NOK. 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.