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Friday, October 16, 2009

Nokia Siemens Marriage May Be Unraveling as Asset Value Drops

Nokia Oyj’s decision to slash more than $1 billion off the value of its telephone-network venture with Siemens AG may signal the partnership is unraveling.

Nokia yesterday wrote down its Nokia Siemens Networks stake by 908 million euros ($1.35 billion), erasing all the so-called goodwill, the holding’s entire worth beyond the assets. Siemens said last month it will need to take “a very close look” at the valuation of its goodwill, which is about 1.6 billion euros.

The partnership, formed to compete against leader Ericsson AB, is falling behind halfway through a six-year deal. Nokia Siemens’s market share fell to 20 percent in the second quarter from 26 percent a year earlier. Ericsson led with 32 percent. Nokia Siemens posted losses of more than 1.6 billion euros in the previous two years. The writedown may help set up a sale.

“It could mean that they are cleaning the books so they could get rid of the whole thing,” said Helena Nordman-Knutson, a Stockholm-based analyst at Oehman with an “accumulate” rating on Nokia shares. “If they did an IPO it would have to be at a discount because it’s loss-making and losing market share. A good restructuring story for whoever dares.”

Nokia Chief Executive Officer Olli-Pekka Kallasvuo, who accomplished the merger soon after taking over, is focused on making the world’s largest phone maker more consumer-oriented to stave off challenges from Apple Inc. Nokia Siemens problems are a time-consuming distraction, Nordman-Knutson said. Yesterday, Nokia posted its first loss since the Finnish company started reporting quarterly in 1996.

Munich-based Siemens no longer classifies its investment in Nokia Siemens, also known as NSN, as strategic, and Chief Financial Officer Joe Kaeser said Sept. 29 the “carrier telecom business is not where we want to be at this time.”

Remain Committed

Kallasvuo said yesterday he’s committed to making Nokia Siemens work. He predicted the business will lose more market share this year than the “slight” drop previously forecast, even as the industry as a whole declines less than Nokia originally thought. Siemens declined to comment on Nokia’s writedown and reiterated the companies are bound together by the six-year deal, spokesman Constantin Birnstiel said.

Nokia and Siemens have not disclosed whether either side has a right of first refusal should one of them wish to sell their stake. Siemens valued its holding at 4.1 billion euros in 2007 and hasn’t updated that figure since. Nokia hasn’t said what its stake is worth, spokeswoman Arja Suominen said.

“A divestment of NSN would certainly be good news for Siemens, but if Nokia wanted the business, I assume it would be a done deal already,” said Virginie Vacca, an equity analyst at Standard & Poor’s in London.

Siemens Divestitures

Siemens, whose products include high-speed trains, power turbines and factory automation gear, has withdrawn previously from industries that no longer match the engineering company’s main business. In 2005, Siemens paid Taiwan’s Benq Corp. to take its unprofitable mobile-phone unit. The business went bankrupt and folded shortly after the takeover.

The German company has also pulled out of cordless phones, and consumer electronics including televisions and stereos, as it focuses on industries including energy, environment, transportation and health-care. Siemens announced plans in January to sell its stake in a nuclear venture to Areva SA.

Espoo-based Nokia is busy fighting for market share in smartphones against Apple and Research In Motion Ltd., which are expanding into Nokia’s European home base, while lower-priced phones are challenged by exports from China and Korea. Kallasvuo has responded by opening retail stores and building a software and services business. The company said yesterday it doesn’t expect to grow its overall slice of the phone market this year.

Job Cuts

Nokia Siemens is wrapping up a three-year effort to cut 15 percent of the workforce, or 9,000 jobs, to save 1.5 billion euros annually by 2010. The equipment maker yesterday reported a third-quarter operating loss of 53 million euros compared with a profit of 177 million euros, as sales declined about 20 percent.

“There’s not much demand for shares in a company with a blurry outlook that’s losing market share,” said Michael Schroeder, an analyst at FIM Bank in Helsinki. “They didn’t even make any material results when the cycle was peaking.”

Nokia Siemens had about 21 percent of the wireless equipment market when it was formed, compared with 26 percent for Ericsson, according to Credit Suisse research. Today it’s 20 percent for Nokia Siemens and 32 percent for Ericsson, according to Dell’Oro Group, a Redwood City, California-based market research group.

“They’re neither fish nor fowl, neither a technology leader nor a cost leader,” said Richard Windsor, an analyst at Nomura Holdings in London. “You’ve got to be one or the other, and they’re losing market share hand over fist.”


Nokia Siemens isn’t the only phone network venture to struggle. Alcatel-Lucent SA, the world’s largest maker of fixed- line networks, has lost more than 8.5 billion euros since Alcatel SA bought Lucent Technologies Inc. in 2006. The company cut more than 17,000 jobs in a bid to turn around operations.

The question remains as to what Nokia Siemens would be worth should either side decide to sell. Yesterday’s writedown made the joint venture 908 million euros cheaper. Nokia currently treats the company as a division. Siemens has lumped its share of the partnership into other joint ventures, including household appliances.

“Nokia is the de facto company running Nokia Siemens,” Per Lindberg, an analyst at MF Global in London. “The synergies are far greater between Nokia and NSN than between Siemens and NSN. What we don’t know is how much Nokia would pay.”

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