■ Management meeting. We recently hosted Nokia management in New York
with investors. Overall, the tone was confident, yet realistic, with the
company's key message around capital returns reassuring and further
elaborating how the ALU deal will bring more scale and scope.
■ Capital structure will be monitored, scope for returns. Management
articulated that if the HERE business is sold, they would still retain the
flexibility for capital distribution, even if the ALU transaction has not or does
not close. We believe this distribution could be high as €3bn, equating to as
much as 13% of the market cap, but the timing remains uncertain. Longer
term, while there are several hurdles for the ALU deal to close (regulatory,
etc.), as well as financial aspects to consider (converts/ squeeze out),
management concede that the combined entity would have potentially
excessive levels of cash (as of Q115 gross cash of €13bn/net cash of €5bn)
and would seek to return this to shareholders. The company also highlights
that the new entity's potential profitability and lower level of volatility should
help them attain an investment grade rating over time.
■ Why, and why now? Management argued that the strategic rationale is
based upon fixed mobile convergence, the industry being in transition
between 4G and 5G, and both entities having gone through a large part of
the restructuring process.
■ Synergies €900mn a net and gross number…the hassle factor. Nokia
target a gross synergy and net synergy estimate of €900mn long term. This
is a function of several factors. First, there is scope for revenue synergies as
the routing business from ALU is sold through a broader channel. Second,
there are dis-synergies in wireless within China and possibly at Sprint.
Finally, management have allowed for the hassle factor, which seems to
include industry competitive reactions. This final factor we believe is possibly
the hardest to estimate. We assume gross savings of €1.35bn, but estimate
Nokia only retain 50% of that, driving LT OMs to 15% in 2019, up from 8.7%,
which we believe is fair.