Nokia – Best buddy

Nokia’s new strategy is focused on the shareholder.

• With the deal to sell the handset business to Microsoft now closed, Nokia has announced its new strategy, capital structure and leadership team.
• Nokia will position each of its three remaining businesses for growth, return €3bn to shareholders over the next 18months and pay down €2bn of debt.
• What will emerge will be a slow growing but steadily profitable infrastructure business with two smaller business both of which have significant upside potential.
• First: HERE
  • HERE is one of only two really decent maps available to makers of devices and services that have a location element to them.
  • Now that devices has been sold, it is also the only truly independent offering and on that basis, there is scope for substantial market share gain as Google’s contracts come up for renewal.
  • This is going to be a slow burn but I expect that 2 or 3 three years will see this business significantly bigger than it is today.
  • Furthermore, I suspect that the strategic value of maps is only going to increase and I can see this business attracting some big suitors with deep pockets in a few years’ time.
• Second: Technologies
  • This is primarily the patent portfolio which to date has really only licensed standard essential IPR, using its implementation IPR to defend its device business.
  • With this defensive strategy no longer relevant to the business, Nokia will now seek to licence this implementation IPR to make a return on the investments made.
  • Assuming there are no major hiccups, revenues should increase steadily over a few years significantly enhancing its value.
  • Again, IPR is a core strategic asset in the technology sector and I can see big suitors willing to pay a very high price for this asset in a few years’ time.
• Nokia’s core business of infrastructure has no reason to need these businesses to be in house and I believe that if the suitors turn up, Nokia will sell both HERE and the patent portfolio.
• This is unlikely to happen for a while as both of these businesses need to be developed and this will take time.
• However, I believe that if suitors are willing to pay more for these assets than they could ever be worth to Nokia on a standalone basis, then Nokia will act in the best interest of the shareholder, sell them and return the cash to the shareholder.
• In a sector where a number of the biggest and fastest growing technology companies suffer from poor corporate governance it is refreshing to find one with the right values at heart.
• I don’t think the stock is going to reflect any of this value anytime soon, but for those with a 3-5 year horizon, Nokia is very worthy of a close look.