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Nokia handsets sale reveals value of revamped NSN unit

Nokia handsets sale reveals value of revamped NSN unit

By Reuters | Updated: 4 September 2013 16:28 IST

Nokia's $7.2 billion sale of its core phones division to Microsoft leaves three disparate high-quality business units whose value should benefit from the deal.

The central operating business will now be the cleaned-up networks unit NSN - once again profitable and wholly owned by Nokia after buying out former partner Siemens - along with a mapping unit and a valuable collection of patents.

Financial analysts said on Tuesday they saw potential for Nokia's value by the sum of its parts to rise by up to 5 billion euros or 45 percent over Monday's close after shedding the loss-making handsets unit and acquiring a pile of cash.

Nokia shares were already up 36 percent at 4.04 euros by 1410 GMT on Tuesday, as hedge funds rushed to cover their short positions on news of the sale to Microsoft.

"The sum-of-the-parts valuation has been indicating for some time that the handset business was polluting the value of the other assets," analyst Richard Windsor of Radio Free Mobile wrote in a note. "Nokia shareholders are the big winners."

Wells Fargo, in a note entitled "Removing the Albatross", wrote: "We view this positively for Nokia, as we believe the path for the Device & Services business was fraught with peril given competitive forces and its limited product acceptance."

The Finnish company, once the world's dominant handset maker, had failed to close the big lead held by Apple and Samsung in the smartphone market before announcing it would sell the business to Microsoft.

Nokia had already tied the fortunes of its handsets business to Microsoft's untried Windows Phone operating software more than two years ago.

"Instead of one Nokia, there will be two global technology companies in Finland, both financially stronger," interim Chief Executive Risto Siilasmaa told journalists. "This transaction creates more value for Nokia than could otherwise be realised."

Network equipment business NSN has emerged as a profitable mobile broadband specialist after years of brutal restructuring during which it shed 20,000 jobs, more than a quarter of the workforce, and quit the fixed-line business before buying Siemens's 50 percent.

(Also see: NSN becomes Nokia Solutions and Networks as Nokia completes buy out of Siemens' stake)

Janardan Menon, technology analyst at Liberum Capital, called the other two remaining Nokia units also "great quality".

He said the patents business, with annual income of about 500 million euros, was one of the industry's most cash-generative, while the mapping business's 85 percent market share in automotive positioned it for good growth and profitability.

Break up
The shedding of the handsets business is already raising expectations of a stock market listing for NSN or the sell-off of the mapping and patents businesses.

"Now they are part of a company which has two other - in my view, rather unrelated - activities going on," said networks analyst Dan Bieler of technology research firm Forrester.

"It looks increasingly like some kind of holding company. Wouldn't it be better to break the whole thing up entirely?" he asked. "I wouldn't be surprised if this is something they would look into more earnestly now."

In various sum-of-the-parts scenarios, JP Morgan valued NSN at between 6.07 billion and 12.1 billion euros - 0.5 to 1.0 times 2014 sales - compared with the 0.3 times 12-month forward sales at which bigger French rival Alcatel-Lucent trades.

The mapping and location services business was valued at 1.02 billion euros, while the intellectual property business - a collection of about 10,000 patents - at 5.64 billion.

Microsoft is paying 1.65 billion euros for a 10-year, non-exclusive use of Nokia's patents as part of the bigger deal, with an option to extend into perpetuity.

A merger of NSN with Alcatel-Lucent has often been mooted as a way for the smaller European players to compete more effectively with Huawei and Ericsson in a cut-throat industry where price wars are the norm.

Bieler said, however, a merger with the French gear maker - or any other - looked less attractive for NSN now, given its relatively strong position.

As a smaller, leaner company focused on fourth-generation LTE and future mobile technologies, NSN is well placed to take advantage of an acceleration in the build-out of LTE networks around the world.

IT research firm Gartner expects global spending by telecoms operators on LTE networks to rise to $16.9 billion next year from $10.8 billion this year as China, Latin America and India catch up with North America, Japan, Korea and Scandinavia.

"Being a lean specialist of mobile broadband and LTE - that's working now. As long as they're allowed to keep doing that, they'll play a role," said Gartner analyst Sylvain Fabre.

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