Nokia Is Not Up For Sale

Recently, an article published at Seeking Alpha claimed that Nokia (NOK) wants to be bought. I disagree with this completely and I will explain why in this article. In fact, if Nokia really wanted to be bought, it could happen very easily and very quickly, but that's not what the company wants at the moment.

Here is what the fellow author said in his article:

"The Windows Phone Elop is depending on to save his job is the Lumia line, which sold 5.6 million units in the first quarter. This sounds great, until you realize that one-third of those sales aren't on Windows 8, and that the total market was 426 million units, according to Gartner. In other words, Windows is getting 1% of the mobile market.

Given that reality, the only possible way to get more for shareholders is to sell the company, and that means monetizing its patents, acquired while it was riding high. FossPatents writes that Nokia is now trying to do just that, throwing new patents on old lawsuits in an attempt to get the HTC One, which AT&T (T) had been dressing up as the "Facebook Phone," given an import ban."

First of all, comparing the number of Lumias sold to the number of all mobile phones sold to reach a market share value of 1% is pretty misleading. The same calculation puts Apple's (AAPL) market share below 8%. We all know that when calculating a phone's market share, we can't look at all phones in the world because smart phones have a separate market than feature phones some of which may sell for as cheap as $20. This is like saying Porsche has a market share way below 0.1% in the car market, when in fact, Porsche's market share should only be calculated against luxury cars, not all cars. If we look at all mobile phones, Nokia's market share nears 20% rather than 1%.

Having said that, let's return to the real discussion. Is Nokia really up for sale? I believe that the answer is a strong no. If Nokia was up for sale, it could sell itself very easily and quickly.

If we open up Nokia's balance sheet, we see that the company has €10.43 billion in cash, which translates into $13.56 billion. The company's total debt is €3.48 which translates into $4.52 billion. In other words, Nokia has $9.04 billion in the bank that's free of debt. If Nokia wanted to go on sale, the first thing it would do is to spin off Nokia Siemens Networks. After all, Siemens wants to get out of the partnership and Nokia would find a buyer much easier if it didn't have Nokia Siemens Networks. Given that Nokia Siemens Networks generated $17.91 billion in revenues and $1 billion in operating profit last year, the company could have an IPO at $10-15 billion. Because Nokia owns half of the joint venture, it would obtain $5 to $8 billion from the transaction.

Once Nokia Siemens Networks got spun off, we would be looking at a new Nokia with 39,000 employees (down from 97,000), $20 billion of cash, and $4.5 billion of debt. Basically, the new Nokia would have $15.5 billion in net cash. Now, keep in mind that Nokia's current market value is $13.67 billion. Basically, whoever buys Nokia would be buying the company for free. If Microsoft (MSFT) wanted to buy Nokia, it would spend $13.67 billion and get lots of good assets on top of $15.5 billion of net cash. Is that a bad deal? In the last few years, several companies at least showed interest in building their own phones, including but not limited to Facebook (FB), Hewlett-Packard (HPQ), Microsoft and even Amazon (AMZN). Most of these companies would need to spend a lot of time, money and other resources to build their own mobile phones, not to mention all the patents they would have to license. If any of these companies were to buy Nokia, not only they would get a lot of valuable patents and technology, but they would get one of the best distribution networks in the world as well. If Nokia were to spin off its Nokia Siemens Networks (which is the first thing it would do if it was truly for sale), many companies would rush to buy the res! t of the ! company (basically for free, after accounting for the company's net cash). Microsoft, in particular, would love to get its hands on Nokia's patents in order to gain competitive advantage over Apple and Google (GOOG). I could even see Apple buying Nokia for its patents. After all, buying Nokia following a NSN spin off would be practically for free.

Some argue that the Finnish government may not let Nokia to be bought by a foreign entity but I am not sure about that one. The Finnish government is upset at Nokia for laying off a lot of Finnish employees and closing down a lot of facilities in the country. Last year, the Finnish government denied the speculations that it was going to bail out Nokia as it practically left the company to its own fate. On bailing out Nokia, the country's Prime Minister Katainen said:

"This is not our business. We are developing Finland into a country where companies can do well, but this is not the way of support along which the government will go."

Finland may be a socialistic country, but it will not support a company that moved most of its operations outside of Finland even though it was out of necessity.

Obviously Nokia isn't up for sale, so we will not see that happening anytime soon. The first time I bought shares of Nokia, it was trading for a little north of $5. Over time, through selling covered calls and buying more shares at cheaper prices, I have been able to bring my breakeven price to low $3s. I will hold onto my shares for a long time until we see the end of this story.

Disclosure: I am long NOK, MSFT, AAPL, HPQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)