re: Cash Hoards (Wireless) and the Share Buyback Option.
This article specifically discusses Nokia in relationship to how rating agencies view but could apply to any business that is not capial outlay intensive and that is generating significant cash. Qualcomm would be an example.
>> Nokia Cash Pile Is An Important Asset - Moody's
Stockholm
Dow Jones
November 27, 2002
biz.yahoo.com
Moody's Investors Service wouldn't look favorably on any move by Nokia Corp. to whittle down its substantial cash pile by buying back shares, a senior analyst for the rating agency said Wednesday.
Nokia's EUR8 billion in cash gives it valuable flexibility to respond to the maturation of the mobile phone market and growing challenges from Asian handset makers, as well as to possibly expand its networks business into new areas, Moody's Senior Vice President Wolfgang Draack said at a workshop here.
Draack is Moody's senior analyst for European telecom equipment makers.
Nokia Chief Executive Jorma Ollila, who has described the company's cash pile as "excessive," said this month that the world's largest maker of mobile phones is exploring returning cash to shareholders by buying back stock, but is wary of risking a downgrade to its credit rating.
"The rating agencies are very conservative," Ollila said three weeks ago at a conference in Spain. "We don't want the negative cycle of a potential cut in our credit rating."
Moody's currently has an A1 rating on Nokia, but has put the rating on negative outlook, meaning there is a bias toward a downgrade.
In a research note Wednesday, CSFB predicted that Nokia's cash pile would rise to EUR12 billion by next year, and said it considers a share buyback increasingly likely.
Asked directly Wednesday if Moody's would downgrade Nokia's ratings if the company paid a special dividend or began buying back shares, Draack responded: " We have a negative outlook on those ratings. And cash is very important in our analysis of those ratings."
Draack said the cash pile could give Nokia the flexibility to extend its network systems business into CDMA2000, the rival 3G standard to WCDMA, which Nokia helped develop and so far has concentrated solely upon. Nokia's networks unit generates about 20% of its sales.
Nokia has projected that WCDMA will eventually serve at least 80% of 3G subscribers. But WCDMA has stumbled out of the blocks, while CDMA2000 is off to a stronger start in Asia, leading some analysts to speculate that CDMA2000's share of the market could grow.
"You can't yet assume that WCDMA will be the dominant standard in the world," Draack said. "There is at least a challenge coming from CDMA2000. The question is how Nokia will deal with that."
To get into CDMA2000, Nokia would probably have to find a partner rather than build the business on its own, Draack said. Even then, the profit margins would probably be lower than for its current network business, he said.
Nokia's position in the Global System for Mobile Communications and WCDMA network market is "very, very strong," Draack said. "But they may feel it worthwhile to enrich the product range."
Draack said Moody's believes the telecom equipment market hasn't yet hit bottom. It is modeling its ratings on an expectation that the decline in demand from operators will slow early in 2003, and the market will stabilize in the second half of the year.
In response to a question, he said Moody's believes that it is important for Telefon AB LM Ericsson's core networks business that the company maintains a presence in the mobile phone market. Sony Ericsson, the joint venture that Ericsson and Sony Corp. formed last year by combining their respective phone operations, has been losing both market share and money.
Some analysts believe Ericsson should abandon the market, but the Swedish company said this week that it plans to provide more money to Sony Ericsson early next year. <<
- Eric - |
