Finnish handset maker Nokia’s (NYSE:NOK) debt rating has been slashed from B+ to BB-, four levels below investment grade, moving it one step closer to junk after it agreed to buy Siemens AG’s (NYSE:SI) 50 percent stake in Nokia Siemens Networks.
Nokia agreed to purchase Siemens’ equipment venture for 1.7 billion euros ($2.2 billion) on July 1, paying 1.2 billion euros and then the remainder as a secured loan from Siemens a year after the deal is completed.
Nokia has obtained committed bank financing for the 1.2 billion-euro cash portion. Rating company Standard & Poor’s said in a statement that Nokia’s net cash may fall as low as 1.3 billion euros by the end of this year. Additionally, Moody’s Investors Service put Nokia on review this week for a downgrade, while Fitch Ratings said the acquisition would pressure the company’s balance sheet.
Nokia, the world’s second-largest manufacturer of mobile phones, doesn’t plan to integrate Nokia Siemens and may decide to seek partners, Chief Executive Officer Stephen Elop said this week.
“With a strong positive gross and net cash position, Nokia was able to take advantage of an opportunity to fully own Nokia Siemens Networks and, we believe, create meaningful value for Nokia shareholders,” Elop said. Timo Ihamuotila, Nokia’s chief financial officer, said in an e-mail, “We will continue to prudently manage our cash resources post-transaction to fully own Nokia Siemens Networks and, we believe, create meaningful value for Nokia shareholders.”
According to data compiled by Bloomberg, Nokia has 5.27 billion euros in debt. Analysts believe Nokia should come to the market to refinance as soon as there’s an opportunity and that acquiring Siemens’ stake in the Nokia Siemens Networks was a positive strategic move to gain control over a business that is more profitable than its own. This additional cash flow may assist in improving Nokia’s phone sales as it struggles to compete with consumer smartphone darlings Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co. (SSNLF.PK).
At the end of the first quarter 2013, Nokia had gross cash of 10.1 billion euro and net cash of 4.5 billion euro. Nokia currently estimates that at the end of the second quarter 2013, Nokia had gross cash of between 9.2 billion to 9.7 billion euros and net cash of between 3.7 billion to 4.2 billion euros. For comparison purposes, if the transaction to purchase Siemens’ 50 percent stake had been closed during the second quarter 2013, Nokia currently estimates that it would have ended the second quarter of 2013 with gross cash of between 9.2 billion to 9.7 billion euros and net cash of between 2.0 billion to 2.5 billion euros, reflecting the deduction of the purchase price of 1.7 billion euros from Nokia net cash.