NSN buyout calls Nokia's solvency into question

Milena Konecna/Informa Telecom & Media
19 Jul 2013

On July 1, 2013, Siemens and Nokia announced that Nokia was buying Siemens’ stake in their Nokia Siemens Network joint venture. This marks the end of their six-year partnership and does not come as a surprise.

Because of its latest restructuring efforts, Siemens was on the lookout for an exit option, one that proved to be difficult to find because its 50% non-controlling stake in NSN represented an unattractive and expensive investment for an outsider that would not be able to influence the company’s direction. It seems that Nokia’s offer came at the right time.

In general, investors and analysts reacted positively to the news, mainly because of the low price of the deal. Nokia will pay Siemens €1.7 billion ($2.2 billion) for its stake in NSN, €1.2 billion of which is to be paid in cash upon completion and the rest by debt a year after completion.

Since 2009, Nokia’s total debt has been generally stable while its net debt has fallen (see fig. 1). But the decrease in net debt has not been enough to compensate for Nokia’s fall in EBITDA, which had a negative impact on net debt/EBITDA, a key metric, monitored by the credit-rating agencies and investors. Net debt/EBITDA has crossed the “save heaven” [sic] of 2.0, nearly doubling to 2.7 between end-2011 and end-2012.

Fig. 1: Nokia’s debt, 2008-2012

The major rating agencies are already questioning the effect this deal will have on Nokia’s relatively healthy balance sheet. The credit rating of Nokia’s debt was downgraded because of the news. S&P reduced Nokia’s long-term debt rating by one notch, to B+, placing it among the highly speculative issuers.

The payments for NSN will have a negative impact on Nokia’s cash and debt. At the same time, Nokia’s EBITDA will not be boosted by the EBITDA of NSN, since Nokia already fully recognizes NSN’s operations in its financial statements, because of its controlling stake in the JV. Assuming that all other variables remain constant, the transaction will cause net debt/EBITDA ratio to reach a high level of 4.8.

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