Nokia, Siemens to merge telecom businesses

FRANKFURT/HELSINKI, June 19 - Nokia and Siemens have agreed to combine the bulk of their telecom equipment businesses to create one of the biggest players in the industry, sending shares in both firms higher.

Analysts put a value of 20 to 25 billion euros ($31.5 billion) on the new business, whose Finnish and German parent companies will exchange no money to do the deal.

The units in the 50-50 venture, "Nokia Siemens Networks", had sales of 15.8 billion euros last year, which would make it the second biggest mobile equipment player and third in fixed infrastructure, the companies said on Monday.

Shares in industrial conglomerate Siemens jumped 8.9 percent to 68.42 euros by 1220 GMT on relief it had found a solution for an operation that has long been a burden.

Nokia gained 5 percent to 16.43 euros as it achieves critical mass for its smaller networks unit.

That business has suffered from fierce price competition, including from new Asian rivals, in the fight for orders from the big telecoms operators in a consolidating industry.

"I think in the longer term it's good. For Nokia, it's size, and size matters when you're talking about the networks services business," said Hannu Rauhala, analyst at Opstock in Helsinki.

He said the deal would allow the companies to grow more quickly in a low-growth market.

"Siemens has a very good position in fixed-line networks, and it offers very good possibilities when you are talking about convergence."

In the overall telecoms infrastructure market, the joint venture will rank behind industry leader Cisco Systems, the merged Alcatel-Lucent, and Swedish-based Ericsson by total sales.

The combination of Nokia's networks unit and the Siemens carrier business in fixed and mobile networks will offer some savings, and up to 9,000 jobs are due to be cut.

It will also help the companies get ahead in converged systems, the technology that allows fixed-line and mobile operations to operate over the Internet.

"The boundaries are blurring," said Nokia's Simon Beresford-Wylie, who will be chief executive of the venture.

Siemens has been searching for years for a solution for its telecoms equipment unit Com, after offloading its loss-making mobile phones division to Taiwan's BenQ last year.

The Siemens Com unit made an operating profit of 454 million euros last fiscal year, or 3.5 percent of its sales of 13.1 billion euros. But Siemens will keep, for now, its Enterprise business which tailor-makes telecoms systems for firms, though it is actively pursuing a divestment.

Nokia's networks division had an operating margin of 13 percent last year and the joint venture will target a margin in "double digits" already in the first year.

PROFIT BOOST

Nokia and Siemens said they both expect to boost their earnings per share by the end of 2007 on a pro-forma basis excluding restructuring charges, which Beresford-Wylie said would total about 1.5 billion euros.

The firms expect cost synergies of 1.5 billion euros annually by 2010 and said they would cut 10 to 15 percent of the new business's combined workforce of 60,000 over four years.

"I like the idea but I think it's risky," said Nomura analyst Richard Windsor.

"On the wireless side Nokia is sub-scale and putting them together will help. But in wireline Nokia has no business whatsoever and it's now being tasked with turning around a business that Siemens failed to do over the last six years."

The deal will face review by competition and antitrust officials in Europe and the United States because of its size and the amount of business the parents do in those markets. But analysts and the companies said they did not expect any major difficulties with regulators.

Nokia executives have emphasised in recent months they are open to acquisitions as well as joint ventures to boost the company's position in various markets. But Nokia has shied away from major takeovers despite hefty cash reserves at 9 billion euros at the end of March.

Monday's deal echoes a joint venture the Finnish group agreed in February with Japanese electronics firm Sanyo Electric Co. to make handsets using the CDMA mobile standard.

Nokia Siemens Networks will have its headquarters in Finland, the base of Beresford-Wylie, who currently heads Nokia's networks division. It will also have a regional headquarters in the Siemens home city of Munich. Siemens official Peter Schoenhofer will be chief financial officer.

Nokia and Siemens will hold a conference call for analysts at 1300 GMT. (Additional reporting by Sinead Carew and Michael Flaherty in New York, Jennifer Tan in Singapore, Jens Hack in Munich, Lucas van Grinsven in Amsterdam and Rex Merrifield in Helsinki)

By: Georgina Prodhan and Tarmo Virki