BREAKINGVIEWS-M&A hopes are no reason to buy Nokia shares

Mon Jun 13, 2011 5:02am EDT

-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Quentin Webb

LONDON, June 13 (Reuters Breakingviews) - Companies that deny they're bid targets are normally protesting too much. Not Nokia (NOK1V.HE). It's hard to see any kind of deal happening to give shareholders in the troubled Finnish handset maker a boost

-- whether a clean takeover, a break-up or piecemeal disposals. -- whether a clean takeover, a break-up or piecemeal disposals. Investors should buy Nokia only if they have faith in its turnaround strategy.

There's little obvious strategic logic in either of the two mooted bidders, Microsoft (MSFT.O) and Samsung (005930.KS), launching a bid. The former is an implausible owner of a hardware manufacturer. And the U.S. software giant stands to gain anyway if Nokia's self-help strategy succeeds, since its mobile operating system will be central to the group's revival. Samsung, Nokia's closest rival by phone volumes, needs neither the Finnish group's technology nor global network. The Korean conglomerate would also face formidable cultural and antitrust hurdles.

Financially, the logic is weak too. Nokia isn't cheap. When U.S. handset rival Motorola hit difficulties in 2009, its market value troughed below 0.2 times trailing sales, Bernstein notes, although it started with less cash and a smaller market share. Analysts polled by Reuters expect Nokia to make sales of 32 billion euros this year, adjusting for the accounting treatment of its telecoms-equipment joint venture Nokia Siemens Networks. That puts Nokia on about 0.5 times 2011 sales.

A break-up wouldn't unearth hidden value. Navteq, which Nokia bought for $8.1 billion in 2007, is one of two world-leading digital mappers. Analysts' valuations are all over the place, but a rough mid-point value today is only about 2.5 billion euros. Plus it's central to the Microsoft alliance. Exiting NSN looks easier. With a newly strengthened U.S. presence and improving margins, it could interest Chinese rival Huawei, and, Bernstein reckons, fetch 4 billion euros.

Meanwhile, the troubled handset business still has value in its 10,000-plus patents, which could be sold for perhaps 5 billion euros if the business was shuttered.

But add 6.4 billion euros in cash and that still only adds up TO 17.9 billion euros, or 9 percent more than Nokia's current market value -- hardly worth the execution risk.

The big challenge for this former premium brand and one-time market leader is to dodge history's dustbin by making covetable phones again. That probably means carving out and dominating a middle-market smartphone segment based around Microsoft's Windows Phone platform. It's hard to see any other option for Chief Executive Stephen Elop, and his investors. He needs to get on with it.

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CONTEXT NEWS

-- Nokia on 10 June said it was still in talks with "multiple parties" about its stake in Nokia Siemens Networks, after a report that U.S. private equity firms had backed away from bidding for a majority stake.

-- The Finnish handset maker said on June 9 that its technology chief was on indefinite leave.

-- Reuters story: Nokia says talking to "multiple parties" on NSN [ID:nLDE7590H9]

-- Reuters story: Nokia CTO on leave amid report of strategy disarray [ID:nLDE75808C]

-- Reuters story: DEALTALK-Plenty of rumours but no real suitors for Nokia [ID:nLDE757116]

-- Reuters story: Even deep value investors see little in Nokia [ID:nN09237724]

(Editing by Chris Hughes and David Evans)

((quentin.webb@thomsonreuters.com)) Keywords: BREAKINGVIEWS NOKIA/

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