Analysis: Nokia and Siemens face tough gear venture exit

FRANKFURT/HELSINKI (Reuters) - Nokia (NOK1V.HE) and Siemens (SIEGn.DE) face a long hard battle to spruce up their telecom gear joint venture for disposal and an initial public offering appears to be the only real exit option.

Analysts say listing Nokia Siemens Networks, a 50-50 joint venture formed in 2007, is the obvious choice because auctioning it off will not attract any bids from industrial players.

Market leader Ericsson (ERICb.ST) will face anti-trust issues while Alcatel-Lucent (ALUA.PA) is still in the midst of integration following its merger in 2006. Chinese rivals have avoided buying western peers.

"Taking it public is really the only option," said Hannu Rauhala, analyst at Pohjola Bank in Helsinki.

But there's work to be done to make the business attractive enough to float. NSN managed to eke out a tiny profit only once in the 13 quarters of its existence, late last year, and after cutting more than 10,000 jobs.

"They have to turn around the business first and it will take probably another two years to do so," says Societe Generale analyst Gael de Bray, adding that he didn't expect any industrial buyers to be willing to buy such a big and loss-making business.

Analysts say NSN will have to cut its cost base by slashing thousands more jobs from the present 65,000 workforce, and win more clients.

NSN last month unveiled a $1.2 billion deal to buy most of Motorola's MOT.N mobile network equipment business to get access to the key U.S. market where it has had a small business so far.

NSN said it expects the deal to open up business relationships with more than 50 telecom operators and to strengthen its position with major carriers like China Mobile, Clearwire, KDDI, Sprint, Verizon Wireless and Vodafone.

GROWTH NEXT YEAR?

Investments in the new fourth-generation LTE (Long Term Evolution) networks could also help an NSN turnaround but its parent companies are likely to baulk at any more cash infusion to fund any capital spending.

While the wireless telecommunications gear market has been contracting since last year, operators cut spending and Chinese vendors drive down prices, all might not be that bleak.

Research firm iSuppli is forecasting a 7 percent growth to $40.3 billion in 2011, helped by LTE investments.

This year NSN reclaimed the No. 2 spot on the market, edging out Huawei, and had 21 percent market share in the second quarter, according to research firm Dell'Oro.

For Nokia, selling even a small stake in the ailing venture would overnight lift its balance sheet as the handset maker would then be able to deconsolidate the loss-making business.

Although only 50 percent owned, NSN is fully consolidated in Nokia's accounts and the Motorola deal will lead to an increase in Nokia's group debt, Standard and Poor's analyst Matthias Raab said.

A share sale would help Nokia cut its exposure to commodity-like telecom gear business -- opening possibility for higher valuation -- and raise cash for acquisitions.

"We see almost endless need for acquisitions at Nokia if the company desires to even remotely challenge Apple and Google in the services space in the future," said Swedbank analyst Jari Honko.

Siemens, which had to book a loss last year due its 1.63-billion-euro impairment on its NSN stake, has been looking for an exit while Europe's biggest engineering company implements a strategy to sell non-core businesses.

As a first step to lessen their exposure to NSN and while restructuring it prior to an IPO, Nokia and Siemens are looking to sell a minority stake to private equity firms.

The parents gave NSN a 1.5 billion euro loan three years ago and part of the loan could be converted into equity, Siemens CFO Joe Kaeser said in December.

Nokia Siemens said on Monday private equity firms have approached its parents offering to buy a stake in the venture, valued at 4.03-7.18 billion euros based on recent sector takeovers, compared with analysts estimates of 15-20 billion euros when formed in 2007.

Some analysts say Nokia and Siemens would be happy if someone bought NSN for nothing, but any buyer might even ask the parents to cough up extra cash to sweeten any deal.

"If you are a buyer of the company and you know you need to invest a billion to get rid of surplus employees then you won't pay anything, you want some cash on top in order to pay for that burden," said one analyst.

(Editing by Sitaraman Shankar)