Nokia Investors Nearing Reward as Microsoft Proceeds Loom

As Nokia Oyj nears the completion of the $7.4 billion sale of its handset unit to Microsoft Corp., investors may find out as early as this week how much of the proceeds -- if any -- will be theirs.

The Finnish company may return as much as 3 billion euros ($4.1 billion) to shareholders, pledging some of it as soon as tomorrow in the form a regular annual dividend, Deutsche Bank AG predicts. Nordea Bank AB estimates the payout could reach 3.7 billion euros, with Nokia probably announcing it in the second quarter. Nokia hasn’t guaranteed any payment.

Chairman Risto Siilasmaa, evaluating candidates to succeed Stephen Elop as chief executive officer, needs to balance shareholder demand for cash rewards with the company’s growth ambitions. Too generous a payout would risk leaving Nokia with insufficient funds for investments and takeovers as it builds a future without the mobile-phone business that made it famous.

“What’s required to run the business should be left in, and the excess must be distributed to shareholders,” said Markus Larsson, who helps manage about 800 million euros, including Nokia shares, at Fondita Fund Management Co. in Helsinki. “It’s reasonable that the balance sheet wouldn’t be left overflowing with cash.”

The Espoo, Finland-based manufacturer is set to gain 5.44 billion euros of cash from the divestment of the money-losing phone division it expects to complete this quarter. That would boost the company’s net cash to 6.4 billion euros, Deutsche Bank analyst Kai Korschelt estimates.

Straining Cash

Nokia is scheduled to report earnings tomorrow. The company has said it will give any cash it doesn’t need to investors, without being more specific. James Etheridge, a Nokia spokesman, declined to comment before tomorrow’s release.

Even as analysts estimate Nokia lost 465 million euros in 2013, Korschelt predicts that it will reinstate a regular annual dividend of 20 cents a share. That would cost the company about 750 million euros. Nokia scrapped the regular payout last year, leaving investors with no dividend for the first time in at least 143 years. Fondita’s Larsson also predicts a regular dividend of 20 cents. DNB Markets projects 30 cents and Swedbank AB 10 cents.

Nokia fell 1.1 percent to close at 5.72 euros in Helsinki trading today.

By reinstating a regular dividend, Nokia would risk straining its cash should something go awry with the Microsoft deal. The company, whose debt is ranked junk by the the three main rating companies, had net cash of 2.4 billion euros at the end of September. It has 2.55 billion euros of debt due this year, according to data compiled by Bloomberg.

Stability Needed

Microsoft and Nokia announced the handset deal in September and have won approval from the European Union. They are still waiting for clearance from countries including China.

Dividend payments could also hurt Nokia’s target to bring its credit rating back to investment grade, something a robust cash balance would help with.

Moody’s Investors Service cut Nokia’s debt to B1, four levels below investment grade, in August. After the Microsoft deal, Moody’s said it could lift the rating “if Nokia’s strategic review leads to a stable business profile, and the group extends its track record of positive operating performance” and manages a conservative capital structure.

To minimize risks, Nokia may delay any payouts to shareholders until after the Microsoft deal is completed, said Sami Sarkamies, an analyst at Nordea in Helsinki. That would mean no regular dividend, he said. Instead, Nokia could pay a special dividend of as much as 1 euro a share, or 3.7 billion euros in total, most likely in the second quarter, he said.

Loeb’s Stake

Mika Heikkilae, who helps manage about 2.7 billion euros at Helsinki-based Taaleritehdas Oyj, said investors would probably settle for less.

“I’d see 50 cents in total,” he said. “This would probably satisfy shareholders.”

Fondita’s Larsson and Deutsche’s Korschelt also predict more payouts to investors, in addition to a regular dividend, once the handset-unit sale is done. Nokia may want to keep 2 billion euros on hand and earmark 2 billion euros to 3 billion euros for acquisitions, allowing it to give a total 2 billion euros to 3 billion euros to investors, Korschelt estimates.

In October, activist Daniel Loeb’s Third Point LLC disclosed a stake in Nokia and predicted the company is likely to pay a special dividend or do a stock buyback after the Microsoft deal. Loeb also expressed confidence in Nokia’s remaining businesses.

Next CEO

When the Microsoft deal closes, Nokia will mainly become a manufacturer vying with Ericsson AB and Huawei Technologies Co. in selling network gear such as base stations and antennas to carriers. It also has a digital-maps business and an advanced-technologies unit that licenses Nokia patents.

A robust balance sheet would help Nokia’s next CEO engineer a revival for those businesses. Revenue at the network-equipment unit fell 26 percent in the third quarter, in part because of pulling out of less-profitable service contracts. Sales at the maps business slumped 20 percent and Nokia’s income from licensing patents had an annual run rate of about 500 million euros in the third quarter.

Rajeev Suri, head of Nokia’s network-equipment unit, is among applicants for the CEO job, people familiar with the matter told Bloomberg News this month. Chief Financial Officer Timo Ihamuotila has also been considered, said one of the people.

“A new CEO and strategy doesn’t guarantee success,” said Louis Landeman, an analyst at Danske Bank A/S in Stockholm. “We’ll see how they take on rivals and manage their cash level. Whoever the new boss is, the person will have a full plate.”

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