Siemens AG (SIE)’s six-year telecommunications venture with Nokia Oyj (NOK1V) reached the end of the road with a buyout by its Finnish partner, the culmination of a months-long search by the German company for a buyer.
Codenamed “Route 66” for the storied American highway, the $2.2 billion deal for Siemens’s 50 percent stake in Nokia Siemens Networks was struck after the industrial group opted against continuing its quest for a private-equity investor, said people familiar with the situation. The owners had considered options ranging from an initial public offering or a spinoff to a buyout of the partnership by Siemens, the people said, asking not to be identified discussing confidential deliberations.
The transaction, announced yesterday, will give Nokia full control of a once-struggling provider of networking equipment whose earnings are improving as wireless carriers increase spending on high-speed data systems. It allows Siemens to part ways with a business that has accumulated 5 billion euros ($6.5 billion) in operating losses over six years and which it has long characterized as peripheral to its industrial investments.
Leading the negotiations were Siemens Chief Financial Officer Joe Kaeser and his counterpart at Nokia, Timo Ihamuotila, the people said.
Parallel Sale Process
The German company, advised by Goldman Sachs Group Inc (GS)., was also running a parallel process to look for a private-equity buyer, the people said. One potential option was for Siemens to buy all of Nokia Siemens Networks and to then immediately sell a majority stake to buyout firms, the people said.
While Siemens discussed a transaction with Advent International, KKR & Co. and TPG Capital, it was clear such a deal would take months to execute -- a timeline at odds with its desire to exit Nokia Siemens as soon as possible, they said. Siemens’s private-equity talks also prompted Nokia to take action because the Finnish company was keen to benefit from Nokia Siemens’s cash flow and rising earnings, the people said.
The two sides then reached an accord on price last week, they said. Bloomberg News reported the agreement late Sunday, with the companies confirming the deal seven hours later.
Siemens’s efforts to sell its stake accelerated after Marco Schroeter, the venture’s chief financial officer, was pushed out in February, a person familiar with the situation told Bloomberg News in May. Schroeter was an ally of Kaeser, the person said. The appointment of former operating chief Samih Elhage in Schroeter’s place led to a deterioration in relations between Munich-based Siemens and Espoo, Finland-based Nokia, according to the person.
Nokia also favored a speedy agreement as the handset maker came under financial pressure, according to people familiar with the matter. Led by former Microsoft Corp. executive Stephen Elop, Nokia is seeking to re-orient its strategy around high-end smartphones under the Lumia series. The company’s earnings and shares have been hammered by competition from Apple Inc (AAPL). and Samsung Electronics Co., whose iPhone and Galaxy devices are the most popular.
In announcing the deal yesterday, Nokia said its 4.5 billion euros in net cash at the end of March shrank by between 300 million euros and 800 million euros during the second quarter. Speaking on a conference call, Elop said a range of options remain open for Nokia Siemens.
Those possibilities include an IPO, a stake sale to private-equity or state investors or a linkup with Alcatel-Lucent SA, said one of the people familiar with the transaction. No decision has been made, the person said.
Nokia Siemens’s employee representatives have been seeking job guarantees in Germany as the company evaluates a potential sale of manufacturing plants in Finland, India and China and to outsource production, people familiar with the matter said. The plan is preliminary and may not result in a transaction.
The 1.7 billion-euro purchase price for Nokia Siemens values the venture at 3.4 billion euros. Hannu Rauhala, a Helsinki-based analyst at Pohjola Bank, estimated Nokia Siemens was worth more than 5 billion euros.
Nokia was little changed at 2:13 p.m. in Helsinki, after rising 3.7 percent yesterday. Siemens slipped 0.5 percent to 79.24 euros in Frankfurt, after yesterday’s 2.6 percent gain.
JPMorgan Chase & Co. (JPM), which advised Nokia on the deal, is structuring financing for the transaction and will be seeking to syndicate its bridge loan to other banks in the coming weeks, according to people familiar with the matter. Given its financial constraints, Nokia is likely to require refinancing in the medium term, with options including the issuance of a high-yield bond or a sale of new shares being considered, the people said.
French rival Alcatel-Lucent, which closed a 2 billion-euro loan deal with Credit Suisse Group AG and Goldman Sachs earlier this year, last week sold 630 million euros in bonds that can be converted or exchanged for its stock.
James Etheridge, a spokesman for Nokia, and Philipp Encz, a Siemens spokesman, declined to comment on how the deal came together. Representatives for Advent, TPG and KKR also declined to comment.
Part of the payment under the agreement will come from a 500 million-euro secured loan from Siemens due one year after the transaction is completed.
Nokia Siemens’s parents abandoned talks with private-equity companies including TPG Capital and Gores Group LLC in 2011 after the buyout firms failed to come up with a compelling offer. The owners then said Nokia Siemens would become a more independent entity.
Private-equity firms are taking a cautious approach to the network equipment industry, which has been upended by competition from Chinese suppliers such as Huawei Technologies Co. and ZTE Corp (763). The Chinese companies have come to dominate emerging markets and make inroads into Europe, though Nokia Siemens and Alcatel-Lucent have preserved their position in the U.S. due to security concerns.
Siemens’s choice of codename for the sale of Nokia Siemens was appropriate for an asset it was eager to unload. Route 66 was a U.S. road linking Chicago to Los Angeles that was immortalized in John Steinbeck’s “The Grapes of Wrath” and the 1946 song “(Get Your Kicks On) Route 66.” Yet after being supplanted by the more modern Interstate Highway System, the road no longer exists as a single artery.
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