Fitch: Nokia NSN Buyout Positive, Timing Could be Problematic

(The following statement was released by the rating agency) LONDON, July 01 (Fitch) Nokia's acquisition of Siemens' stake in Nokia Siemens Networks makes strategic sense, but puts pressure on Nokia's balance sheet and comes at a time when the future of its handset business is still uncertain, Fitch Ratings says. The purchase gives Nokia 100% ownership of the division that generated all group profits over the last year. The move is also positive because NSN's future looks more secure than that of the group's Devices and Services business. NSN's strategy of focusing on higher-margin projects and more profitable regions at the expense of a broader geographic scope seems to be paying off. Its underlying operating profit margin over the last 12 months was 8.2% compared with 0.5% in the 12 months to Q112 and 0.6% to Q111. However, the outlay of EUR1.7bn on NSN (an initial EUR1.2bn plus EUR500m in one year) weakens the group's balance sheet while the Devices and Services division's ability to generate sustainable positive cash flow is questionable. This is largely already captured in the 'BB-' rating. The Devices and Services division has now posted two consecutive quarters of underlying profitability, but visibility is still very limited. The Lumia suite of smartphones has yet to reach critical mass and the feature phone business is strongly challenged by lower-priced Android manufacturers. Nokia group's performance over the last 12 months has exceeded our expectations, helped largely by strong profitability and cash flow generation at NSN. The group's net cash of EUR4.5bn at end-Q113 was higher than Fitch's base case. However, NSN's cash flow generation and net cash position of EUR1.5bn at end-Q113 benefitted strongly from working-capital inflows over the preceding year. Also, the telecoms equipment market is likely to remain quite cyclical and affected by the expected soft economic conditions. NSN's future performance will not be immune to these industry trends. Contact: Owen Fenton Associate Director Corporates +44 20 3530 1423 Fitch Ratings Limited 30 North Colonnade London E14 5GN Stuart Reid Senior Director Corporates +44 20 3530 1085 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.