Nokia M&A talk stirs share valuation rethink

Investors alert to M&A speculation around Nokia are taking a fresh look at whether the struggling mobile handset maker's share price undervalues its assets and increasing signs of financial stability.

Reports of interest from Huawei and Microsoft show Nokia is still vulnerable but several analysts said they were more optimistic since plunging sales and alarming cash burn raised fears of default several months ago.

They said there was no contradiction between a resurfacing of M&A talk and some signs that Nokia might recover from a mauling by rivals Samsung and Apple in the key smartphone segment in recent years.

"The company's not in a crisis like it was a year ago. That makes Nokia now more likely to be a target of merger or acquisition," said Mikael Rautanen, an analyst at equities research firm Inderes.

The Wall Street Journal on Wednesday reported that Microsoft recently considered buying Nokia's devices business, but that talks failed over price.

Nokia officials declined to comment on the report on Wednesday and on Thursday.

That followed comments by a Huawei executive to the Financial Times that it was "open-minded" about acquiring Nokia, although the Chinese company later denied plans to buy Nokia.

Nokia shares have risen around 14 percent to 3 euros over the past week on the reports as well as news that Siemens was in talks to sell its stake in their equipment joint venture, Nokia Siemens Networks.

Shrunken value
Nokia's current market capitalisation around 10 billion euros is a shadow of its peak around 200 billion in 1999.

But some analysts, who mostly have a price target of around 3 euros on Nokia shares, say the company's underlying value, including intellectual property, its navigation business HERE and stake in NSN, is closer to 5 euros.

"If I just look at the different assets, I arrive at a value of that's clearly above 3 euros," said Swedbank analyst Hakan Wranne, who also has a target of 3 euros on the shares. He was wary of predicting recovery but acknowledged improvement.

"We had the perception of a great default risk last fall and I think that's not there anymore," he said.

"It is undervalued, although it's only undervalued if they succeed," said Jyske Bank analyst Robert Jakobsen, who has a "buy" rating.

"We're not entirely out of the uncertainty. But I'm seeing improvement and I'm not seeing that reflected that much in the stock price."

Credit markets have mirrored receding fears over the future of the fallen mobile phone titan.

Its 6.625 percent bond maturing in May 2019 has recovered around 20 points over the last year and its five-year CDS has almost halved over the same period.

Spreads on Nokia's outstanding bonds shrank on Thursday following the report on talks with Microsoft.

Quicker pace
First-quarter results shocked markets with a steeper-than-expected fall in sales of cheaper mobile phones, but investors said growth in Lumia sales and a better-than-expected cash position raised hopes the business was stabilising.

Nokia has unveiled handsets in multiple price categories in the past few months, and is expected to unveil a smartphone with an advanced lens in July.

The faster pace in product launches has also improved sentiment.

Nokia executives say they have halved the time to launch smartphones from three years ago, when it took 22 months to come to market with a single handset.

In May, Nokia launched the Lumia 925, a lighter and slimmer model of its high-end smartphone range. It has also been focusing on lower-priced handsets and in February launched a 15-euro basic phone aimed at first-time buyers.

Some investors were particularly encouraged by the May launch of the $99 Asha 501, which straddles the feature phone and smartphone market in a category seen increasingly crucial as the high-end market becomes saturated.

"The new Asha launch, to some extent, answered fears that I had on the volume decline." said Antti Karessuo, portfolio manager at Pohjola Asset Management, one of Nokia's top 15 investors.

"Things are looking better, and we're more optimistic than we were before."

Nokia still has a long way to go to reverse its decline.

Apple and Samsung together commanded around half of the global market for smartphones last year by sales volume, and accounted for around 90 percent of profits thanks to their high margins, according to ABI Research.

Nokia CEO Stephen Elop remains under pressure to convince investors that his controversial decision in 2011 to switch to Microsoft's operating system was right.

But the Kantar WorldPanel Survey earlier this month showed the Windows Phone grew the fastest of any smartphone operating system in the three months to April, albeit from a low base.

Its share in the United States rose to 5.6 percent from 3.8 percent a year earlier. In the UK, it doubled to 8.4 percent.

© Thomson Reuters 2013