Over the last month, we have read about two very intriguing and significant stories regarding Nokia (NYSE:NOK) and its handset divisions. The first story arose on June 18th when the chairman of Huawei's consumer business group announced that they were considering purchasing the company. This statement was later retracted, and it could easily have been written off as merely an errant remark were it not for another story which swiftly followed. This was the report on June 19th in the Wall Street Journal that Nokia and Microsoft (NASDAQ:MSFT) had held advanced talks regarding the purchase of Nokia's handset divisions. It is especially notable that apparently these talks had reached the "oral agreement" stage. Both these reports introduce a sizeable risk that Nokia may be interested in jettisoning the phone component of the company, yet we have had no press release from Nokia telling shareholders if they are still committed to selling phones. This is a problem for all shareholders and must be taken under consideration.
Recently, there have been several Sum-of-The-Part (SoTP) calculations on the value of Nokia's phone component, which to varying degrees, present a bullish case on owning Nokia. Interested readers can find some Seeking Alpha articles on the subject with differing takes here, here and here. JP Morgan also recently revised its SoTP analysis upwards stating:
Recent data-points that Nokia has actually considered selling the handset business, that based on industry data it has raised supply chain indications for FY13, and with growth in mid and low-end smartphones strong, with Nokia having products in that range, indicate to us that the end game is potentially close for Nokia. The company could turn around smartphones on higher volumes or negotiate a sale if they opt to exit the business. NSN re-structuring should continue and it could potentially be ready to embark on the next stage by end '13. We apply a probability weighted SoTP methodology to assign some value to handsets which has not been valued in our SoTP in the past. This yields a €3.6 TP (from €2).
(Note:- €3.6 is $4.62 as of 7/7/13)
Even this bullish analysis undervalues Nokia, having been released hours before the announcement of Nokia's purchase of the other 50% of Nokia Siemens Networks. More importantly, it indicates that major analysts are starting to fundamentally reappraise Nokia upwards, which can only be good news for Nokia shareholders.
All of this would be just fine for Nokia longs. However, the JP Morgan analysis goes on (in a paragraph which was not widely reported by the press):
…Nokia actually has products today to satisfy growth in low/mid end smartphone markets, enabling growth in its smartphone volume; If data-points re Nokia raising component orders are correct & based on sell-through then Nokia smartphones could see turn-around in 2H opening options of staying in smartphones or selling profitable business; Nokia is a pragmatic company. If Windows phones do not get 5% share by 4Q13/1Q14, we believe Nokia will reflexively turn to Plan B, which could be a potential disposal, shut-down or running for cash of the handset business. Android is not a likely/attractive Plan B in our view. (bold font added)
This comes to the crunch point, now not only do we have the FT and WSJ writing stories on Nokia's potential sale of its handset unit, we also have major analysts considering this to be a serious possibility. Yet from Nokia we haven't heard a single story telling us that it is committed to keeping its handset divisions.
I have a few questions regarding this that worry me.
- How much would Nokia be willing to sell its handset divisions for?
- What would it do with this money? Would it use it to buttress its cash reserves, engage in acquisition activities, redistribute some to shareholders via a special dividend or what?
Regarding the second question, we do not know if Nokia has bought the other 50% of NSN with the funds it will gain from selling its handset units at some point in the near future. That is a big question. If the answer to that is that it has, then instead of being shareholders in a company with 3 divisions, NSN, HERE and its handsets, Nokia longs could find themselves owners of only HERE and NSN. Personally, while I think NSN and HERE offer a degree of much needed diversification to Nokia, its handsets are what have the potential to offer high revenue growth to the company.
Simply put, I would like reassurance that Nokia is committed to owning its handset divisions long-term. There have been no press releases regarding this, which is notable in itself when one sees some of the other releases that have been made in the last month, including one on the S&P credit ratings downgrade. I appreciate that complex negotiations normally have non-disclosure agreements and forward-looking statements are difficult to produce. Nevertheless, that does not make it impossible for Nokia to give us some guidance on this issue.
With this, I will leave all readers with a question which requires every shareholder's opinion.
Would you be comfortable to wake up tomorrow to find out that Nokia no longer had a handset division?
With Nokia apparently having almost sold this division to Microsoft and not telling us anything about it, with interest from Huawei and with JP Morgan treating asset-disposal seriously, it is a question that requires an opinion from anyone interested in buying, selling or holding Nokia's shares.
Personally, I do not think that a handset sale will have a direct adverse impact on the share price. However it would fundamentally change the nature of the company and alter its future growth prospects. For this reason, I would strongly consider disposing all of my shares if such an eventuality does occur.
Disclosure: I am long NOK. I may reduce my position between 8th July-17th July preceding the 2Q2013 earnings report. 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.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.