One Last Dance?
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Nokia (NYSE: NOK) and Siemens (NYSE: SI) had a pretty good alliance with their Nokia Siemens Networks (NSN) joint venture over the last six years, as it was an opportunity for both companies to develop a pretty reliable source of revenue.
The latest numbers
In its last quarter—Q1 of 2013—Nokia Siemens Networks reported a euro-denominated loss of €143 million, down from €1.3 billion in the first quarter of 2012. This massive improvement, though still a loss, was a direct result of the joint venture’s restructuring efforts, which improved gross margin to 33.8% in Q1, up 7.2 percentage points year-over-year.
According to NSN’s CEO Rajeev Suri, this increase indicated that the venture had “fundamentally improved execution capabilities across the organization, through steps such as centralization of pricing, shifting to global delivery of services, and strengthening contract management.” In other words, this was a perfect time for Nokia to swoop in and gain full control, and that they did.
Alas, after this partnership came to a legal end in April, Nokia pulled the trigger and agreed to buy out Siemens of its 50-percent state in the venture for a little more than $2 billion. While the deal is expected to be approved and finalized sometime during this quarter (pending standard regulatory approval), Nokia Siemens Networks is still viable as a joint venture and still makes deals.
And this most recent one will likely keep improving the venture's footprint in emerging markets like Asia and the Middle East. This week, perhaps as one of the last major deals for Nokia and Siemens as a joint venture, Nokia Siemens Networks announced a $325 million agreement with Mobily in Saudi Arabia to upgrade its entire telecom network from 3G to 4G LTE within the next 18 months.
This deal follows on the heels of a recent announcement that the world's largest wireless carrier, China Mobile (NYSE: CHL) is working with Nokia Siemens Networks to deploy about 200,000 LTE base stations in its coverage area by the end of this calendar year, which will be a further boost to both companies' revenues as the Nokia-Siemens partnership fades into the distance.
In the first quarter of this year, Nokia Siemens Networks posted more than $3.6 billion in revenues, though the Middle East had accounted for less than 10 percent of that total. This deal with Mobily alone matches the single-quarter revenue total for the NSN from the region. Meanwhile, the Asia Pacific region is the biggest boon for the venture (which makes sense, considering the expanding customers base for smartphones in India, China, Malaysia and Indonesia), accounting for nearly a third of the revenue.
What should investors do?
Obviously, Nokia hasn’t had the best of years in 2013 thus far, essentially returning zilch, and Siemens is actually down 7.3%, but there may be a play here. Shares of Nokia popped more than 2% on the day that its buyout plans for NSN were announced, and even though S&P cut the tech company’s debt rating to B+ from BB- on concerns of cash flow degradation, investors are hoping that the move can be a net positive over the long term.
As mentioned above, Nokia is set to establish a massive partnership with the largest telecom in the world, China Mobile, in what will essentially bring it further into the 21st century. China Mobile’s sheer size—it has 730 million mobile subscribers alone—gives Nokia solid revenue potential here; it holds just over 62% of the entire Chinese marketplace.
Due to the generally improving financial position that Nokia gains by buying out NSN from Siemens, we’d have to consider Nokia a better buy than Siemens at the moment, despite the fact that the latter is cheaper on a valuation basis. Siemens trades at 10.8 times forward earnings and a PEG of 0.2, while Nokia trades near 30 times year-ahead EPS, but in the fast-paced world of smartphone tech, we’d rather have the momentum play—Nokia is just that.
Do you think investors like fund manager Jim Simons—see his full equity portfolio—agree with that sentiment? Give us your thoughts in the comments section below.
This article is written by David Woodburn and Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!