Nokia's move to buy out Siemens AG's share
of their network equipment joint venture strains a balance sheet already under pressure from a loss-making handset business, which could burn through its cash soon in 2014.
While the 1.7 billion euro price tag Nokia will pay Siemens to gain full control of Nokia Siemens Networks (NSN) is cheaper than expected and analysts say the business offers good growth potential, the cyclical network business is not profitable enough to cover losses at the mobile phone unit.
That leaves many questions unanswered about whether the one-time tech darling, now on junk ratings, can turn its mobile phone business around.
"If they constantly have to be worried about the cash position, it restricts their ability to move, to react to changes in the market," said Pohjola analyst Hannu Rauhala.
Nokia put its net cash position at 3.7-4.2 billion euros at the end of the second quarter, and said that if the NSN deal had closed in the second quarter, the cash position would have been 2.0-2.5 billion euros.
This indicates it had a cash burn of 350-850 million euros in the second quarter - a level which took many analysts by surprise.
Canadian bank Canaccord said Nokia's cash burn could continue at a similar rate in the coming quarters and forecast the firm could end 2014 with just 1 billion euros net cash. Bank of America Merrill Lynch said such a rate suggested Nokia could be in a net debt position in only four quarters.
A tight cash position compounded by a fierce battle against wildly popular smartphones from Apple and Samsung Electronics could weigh on Nokia's financing costs and debt renegotiations, even though it should have no issues staying on top of upcoming maturities.
Nokia, rated Ba3/BB-, has a euro-denominated bond outstanding that matures next February. Its 5.5 percent 1.25 billion euro bond is currently bid at a cash price of 102, according to Tradeweb. Nokia bonds are on the same level as before the NSN deal.
Rating agencies Moody's, Fitch and S&P last year slashed Nokia's long-term credit ratings to junk, seeing more losses and cash burn as it struggled to reverse its decline in the smartphone market with Microsoft Windows Phone software.
Nokia's CEO Stephen Elop has long been under fire for sticking with a Windows handset operating system that has not caught on with consumers. On Monday, Elop said NSN would continue to run as an independent entity and he did not rule out listing or selling it.
"As for the future of NSN, as we've said consistently there is a range of options that could exist for NSN over time," he said.
Many believe Nokia could list the network business or boost its cash position by selling network equipment manufacturing.
Fitch's Owen Fenton said on Tuesday that during the past year Nokia's handset and network businesses had outperfomed the credit agency's expectations, but noted in the mobile phone business "the visibility is still extremely limited".
He said that the acquisition of the profitable network business was positive, but added that "it does not make too much difference."
© Thomson Reuters 2013