(NOK) Nokia and Siemens AG Venture Nokia Siemens Network Fails to Find Investor

Nokia Siemens Networks (NSN), a 50-50 joint venture between Nokia Corp. (NOK) and Siemens AG (SI) to provide telecom infrastructure solutions, has suffered a setback. For the last 6 months, NSN was looking for a third party investor in order to inject funds, thereby reducing the stake of both Nokia and Siemens. Earlier this month, The Financial Times reported that the two major U.S. private equity groups, Kohlberg Kravis Roberts and TPG, have backed out from their bidding for a significant stake in NSN.

The departure of these two private equity groups primarily resulted from disagreement between the firms and NSN over price and controlling stake of the venture. Nokia, however, announced that NSN is negotiating with several other investors. Recently, The Wall Street Journal reported that both Nokia and Siemens are at present trying to infuse more cash in their joint venture in order to revamp its businesses. If this report comes true, then it will result in lack of investor for NSN, which will be a huge concern for the telecom infrastructure developer.

Despite being the second largest company in this field after LM Ericsson AB (ERIC), NSN always remains in sticky wicket once it was formed in 2007. Huawei and ZTE, the two Chinese telecom infrastructure manufacturers are fighting neck and neck with NSN to capture global market share. In the previous quarter, adjusted operating margin of NSN was 0.1% compared with 0.6% in the prior-year quarter.

North American market always remains the weakest spot for NSN. This was primarily attributable to the company’s lack of innovative CDMA/WCDMA based infrastructure solutions. The proposed merger of AT&T (T) and T-Mobile USA may become a huge setback for NSN. A merger between the second and the fourth largest telecom operators in the U.S. will certainly affect NSN. The company generates only 6% of its total revenue from these markets, in which T-Mobile was the largest customer.

A potential acquisition of T-Mobile by AT&T may eliminate NSN as a vendor for the merged entities. LM Ericssonand Alcatel-Lucent (ALU), are the two largest equipment vendor of AT&T, whereas NSN has a very limited presence in AT&T. In this juncture, the only way through which NSN can remain relevant to AT&T is by offering aggressive pricing that can beat its rivals. However, in doing so, the company may jeopardize its bottom line.

We believe probably all these negative points are factored when the private equity groups put their bid offer, which was disagreed by NSN. It remains to be seen how NSN can restructure itself in the keenly competitive telecom infrastructure market.

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