Deutsche Bank upgrades Nokia stock to hold on Microsoft tie-up

Deutsche Bank has just upgraded Nokia to hold on news of the Microsoft-Nokia tie-up that's seen shares in Nokia jump by 45 per cent on the open.

Kai Korschelt, research analyst, Deutsche Bank:

Selling D&S to Microsoft
This morning Nokia announced that it is selling its Devices & Services business to Microsoft for E3.8bn and a 10-year license to its wireless patent portfolio for E1.65bn, for total proceeds of E5.44bn or E1.4/share in cash. Nokia’s current CEO Stephen Elop as well as most key handset executives are moving to Microsoft.

There is a very material break-up fee (E750m) but we do not believe that the deal will face meaningful regulatory scrutiny as Microsoft does not have a handset business or market share currently.

Stock could trade up to E4 to 4.5/share – Upgrade to HOLD
In last week’s research note “Value trap” published on 27th August, we had looked at this hypothetical scenario whereby Nokia would be able to divest its heavily cash-burning Devices & Services division, which has been burning c. E600m in quarterly FCF over the last 18 months.

Our analysis indicated potential EPS power of Nokia’s ‘rump’ ie its NSN and IP/patent business of around E0.24-0.25 cents for 2014/15, although we model NSN’s earnings/adj EBIT declining moderately in 2014. If we apply 12x 2014 P/E (similar to Ericsson’s current multiple) and add back E1.4/share in cash proceeds from this deal, the stock could trade up to E4.4 potentially.

Given the material expected benefits to Nokia’s earnings, net cash and upside in the share price from current levels, we upgrade from Sell to Hold.