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Siemens may exit NSN as market looks to Ericsson results

By CAROLINE GABRIEL

Published: 21 October, 2009

READ MORE: M&A | Europe | Nokia Siemens Networks | Ericsson | UMTS

All eyes are on Ericsson, which reports its third quarter tomorrow and is expected to improve its market share, at the expense of Nokia Siemens and its own profit levels. The Swedish leader is a key bellwether for the whole sector, and if its results reflect any upturn in the troubled infrastructure segment, this will also point to the scale of the problems at NSN, whose terrible quarter dragged Nokia into an unprecedented loss last week.

While the handset sector is recovering nicely on a boost in consumer spending and normalized inventories, the infrastructure business was always going to be slower to show green shoots, operators having deferred many investments while they weathered the storm. But the loss of profits and market share at NSN is expected to be worse than at key rivals like Ericsson and Huawei, showing that the joint venture has problems that go beyond the economy. There is even rising speculation that the JV's parents would like to divest the firm, though it is unlikely to find a buyer prepared to pay a respectable price.

A report in the Financial Times Germany says that Siemens has wanted to exit the venture, its only remaining telecoms business, "for some time", and that Nokia is starting to think the same way. But "I cannot imagine that NSN in its current state could be of any interest to a financial buyer," said the newspaper, quoting financial sources. Nokia CEO Olli-Pekka Kallasvuo officially remained committed to the venture, but the firm was forced to write down its stake in NSN by €908m, erasing all the goodwill in the asset. Siemens said last month that it would take "a very close look" at the valuation and the ensuing writedown could set the stage for a sell-off, halfway through a six-year JV deal.

"It could mean that they are cleaning the books so they could get rid of the whole thing," said Helena Nordman-Knutson, an analyst at Oehman, speaking to Bloomberg. "If they did an IPO it would have to be at a discount because it's lossmaking and losing market share. A good restructuring story for whoever dares." But most analysts believe few firms would have the taste for such an adventure, especially as NSN did not perform well at the peak of the cycle either, as it was going through its merger and restructuring. If Nokia wanted full control, it is likely this agreement would already have been made, and the Finnish firm has sufficient challenges keeping its lead in handsets and moving into web services. Ericsson got key assets on the cheap with its Nortel buy and would likely prefer to sideline NSN than buy it, while Alcatel-Lucent is in no position to make a major acquisition. That would leave Huawei, with all the usual political problems such a deal would entail, or a private equity transaction.

NSN has been successfully shifting the balance of its business towards services, which will enable it to reduce costs, attract higher value deals and, over time, improve margins, but in the short term services deliver lower upfront profits. In its core business, network equipment, it faces a dual challenge. At the low end, it sees massive price pressure, especially from the Chinese majors but also from Ericsson, which leverages its scale and its ability to bundle, to compete aggressively on price in markets like India. NSN has tried to maintain its margins - for instance by refusing to bid on some Indian deals as they would be loss leaders - but appears to be fighting a losing battle. In market share terms, at mid-year it had 20%, down from 21% when it was created - but in the same period, Ericsson's has risen from 26% to 32%.

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