Nokia Corporation (ADR) (NOK): Implications for convertible investors
September 9, 2013
By Aman Jain
valuewalk.com
Nokia Corporation (ADR) ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) €750 million 5 percent 2017 convertible bond ‘leapt’ on Tuesday (last week) along with shares and straight bonds owing to the announcement of the Microsoft Corporation ( NASDAQ:MSFT)-Nokia deal under which Microsoft will buy the Devices and Services division (D&S) of the Finnish firm. Analysts Luke Olsen, Angus Allison and Kim Berg from Barclays note that convertible is a good alternative for income enhanced equity with potentially positive convexity and having significantly lower credit spread and volatility assumptions.
Volatility less after the dealNokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) has kept its bond dividend protected in case the company opts to return cash to shareholders. However, the analysts are cautious over the effect of hedging and the proceeds will be utilized to lower the debt. Analysts are expecting a credit spread of 190 basis points based on significant reduced credit risk and a steeper credit curve. According to the analysts, cash earned from the deal will enhance the liquidity and could assist in bringing down the debt.
Barclay’s analysts have assumed volatility of 32 percent, which is slightly lower than before. However, on the credit adjusted basis this volatility is six points below at 36.5 percent. Fixed-strike option-implied volatilities for December 2014 are less by eight points. Further, according to the analysts, the reduction in volatility after the transaction is dependent upon reduced business and financial risk, an initially cash rich balance sheet.
Un-concluded deal a potential risk to convertibleRegarding the Microsoft-Nokia deal, analysts expect it to be concluded in the first quarter of 2014 after getting approval of shareholders and regulators. A potential risk for the convertible may be if the deal fails to conclude. However, there are negligible chances of such happening. If the deal fails to get regulatory approval, then Nokia is entitled to receive $750 million as termination fees from Microsoft.
Nokia’s Division and Services segment (having 32000 employees) will be wholly transferred to Microsoft. In the financial year 2012, Nokia’s device and services segment contributed around €14.9 billion, or almost 50%, of Nokia’s sales. Nokia Corporation (ADR)( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) and Microsoft have also agreed upon a licensing deal whereby Nokia will grant Microsoft an exclusive 10 year patent license, and in return Microsoft will give right to ‘HERE’.
Segments benefiting most from the deal Nokia-Microsoft dealNokia will provide Microsoft with a choice of extending the patent agreement to perpetuity. Net purchase price is €5.44 billion out of which €3.79 billion for Devices & Services and €1.65 billion for the patents, license and option. Further, Microsoft has agreed upon offering instantly €1.5 billion of financing to Nokia, in three equal tranches of convertible bonds with 5, 6 and 7-year tenors.
Three segments of Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) namely Nokia Solutions and network, Network infrastructure and services and HERE will be benefited most by the deal. In the second quarter, all three segments racked in sales of €2,781 million, €233 million and (est.) €155 million, respectively. |
