Nokia – Here and now

Reply to this post

RFM AvatarSmall

 

 

 

 

 

It is too early to sell HERE.

  • It seems that Nokia may be seeking to acquire part of Alcatel-Lucent (I presume the wireless assets) and to pay for it by selling the HERE business.
  • The acquisition of Alcatel-Lucent’s wireless business makes some sense as infrastructure is a brutal market dominated by two players.
  • At one end of the market there is Ericsson which is the technology leader and at the other there is Huawei which is the cost leader.
  • Between them they have created a balance in the market but for anyone caught in the middle, the outlook has always been pretty bleak.
  • That being said, Rajeev Suri has done an excellent job at turning Nokia Networks around and the timing of buying Siemens’ out of its share was perfect.
  • Now it is running smoothly, it is time to turn his mind to the long term and with Ericsson and Huawei both meaningfully bigger than Nokia Networks, the outlook is pretty tough.
  • More than handsets, infrastructure is a game of scale where one needs to maximise the revenues over which to spread the fixed costs of Research and Development and Sales and Marketing.
  • If one lacks scale, then the bigger competitors can still make a decent return while squeezing smaller companies out of the market.
  • This is exactly what is happening in Android and what has been going on for years in semiconductor memory.
  • As a smaller player, Nokia Networks clearly needs more scale and buying the wireless assets of Alcatel-Lucent will help it do that.
  • However, this is a road fraught with risk, as execution of these sorts of mergers in the past has proved very difficult and in every case it has failed to fix the problem.
  • Given Rajeev Suri’s execution of the turn-around of Nokia Networks, He has a good chance of making this work but history is dead against him.
  • The bigger problem for me is that it looks like Nokia is thinking of selling HERE in order to pay for it.
  • HERE is one of only two really credible solutions for a high quality map and following the divestment of the handset business, HERE is the only independent choice.
  • I am pretty sure that Microsoft wanted to acquire HERE as part of the handset deal but was rebuffed in its advances.
  • This is because there is an opportunity for Nokia to really grow market share as Google Maps deals expire and then sell it on for a much higher price.
  • Many of the deals with Google were struck some time ago and many customers now view Google as a competitor and I think would welcome an independent supplier of mapping data.
  • I think that much of this opportunity still lies in front of HERE and as a result selling HERE now for E2bn is doing shareholder a disservice.
  • Consequently, I think that Nokia would be better off holding onto HERE and raising the money via debt.
  • The fact that there are a number of private equity shops all considering bidding for HERE is a good sign of how much value Nokia will be leaving on the table if it sells now.
  • Shareholders will be worse off if it does.

 

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

Blog Comments

If there is really an opportunity to grow market share, wouldn’t it be better to chase that under a management who is not distracted by the demands of the networking business? If that opportunity is attainable, I am sure investors would be valuing the company based on that future earnings potential. If the market doesn’t think it is worth more than the current earnings dictate, maybe the opportunity to grow market share is not all that great or it is not a very profitable market to begin with.

If the buyers are considering a purchase for strategic reasons (e.g. Apple, MS or Samsung), market share does not matter all that much and this year is as good as any.