If you have not asked yourself about the ultimate death of Nokia Corporation (NYSE: NOK), it is time to rethink this situation as one which is growing more and more likely each month.  It was now over a year ago that we suggested that Nokia better make a Hail Mary merger effort with Research in Motion Ltd. (NASDAQ: RIMM).  That time has come and gone.  The pressure from Samsung, Google Inc. (NASDAQ: GOOG) and Apple Inc. (NASDAQ: AAPL) has just overwhelmed this company and the only people who carry Nokia phones now seem to be the impoverished in emerging markets who just got their first cellphone ever.

Some investors still ask about the turnaround strategy for Nokia. What they need to realize is that it may very well be too late, even if Nokia’s death could be a long drawn out process that takes years.  Now it is time to evaluate Nokia as an asset value.  Will the company just halt building phones and distribute its remaining assets to holders just to save value at lows not seen in more than a decade?  Not likely.  Still, here is an attempt to value Nokia.

BMO Capital Markets said the company is on the way to becoming irrelevant and puts that value at under $9 billion.  The value is $6 billion in cash and about $2.5 billion in patents. Sadly, BMO gave a Zero value for Nokia-Siemens. Argus recently maintained a Hold rating but noted that Nokia is “Going from troubled to endangered.”

Based on the valuation today, we saw in the last week that Nokia was upgraded to Neutral from Sell by Citigroup. Oppenheimer in the last week raised Nokia’s rating to “Perform” from “Underperform” as it evaluates Nokia’s valuation.  Both calls were after Nokia’s restructuring announcement.

It may seem impossible to many people that Nokia could actually die.  It is (or was) the jewel of Finland as a massive contributor to that nation’s GDP. It is over 140-years old. It had some $50 billion in revenues in 2011. It employs over 100,000 people.  It claimed at the end of 2011 to have over 1.3 billion people around the world using Nokia each day.  Before you consider this as ‘the impossible’ scenario, go back and think about the deaths of Nortel and Palm.

With over $6 billion in net cash, Nokia has some decisions to make.  Its restructuring is not expected to keep it from posting an operating loss.  While Microsoft Corporation (NASDAQ: MSFT) is expected to help assist Nokia financially, the reality is that Nokia will end up paying royalties to Microsoft for the use of Windows. Credit Suisse puts that outflow at about $900 million annually.

Nokia’s latest annual report noted on its patents, “We have built our IPR portfolio since the early 1990s, investing over EUR 45 billion cumulatively in research and development, and we now own over 10,000 patent families.”  Nokia is said to generate close to $600 million from its patents via royalty payments, but if that figure is higher then the ‘value’ could increase as well.  Obviously this patent portfolio is not worth anywhere close that 45 billion Euros figure.  In the company’s most recent restructuring announcement, Nokia telegraphed that it would sell some of its patents at the right price.  Since the patents will not live forever and since the companies paying royalties constantly look for workarounds, we will value this patent and intellectual property at $3 billion.

Nokia’s market value, based on its ADRs which trade in New York is roughly $9.3 billion.  What that value can be in another year depends upon how much cash it blows through.

Nokia must discontinue any efforts toward share buybacks and toward dividends, even if those are minimal at this point. No buyback cash has been spent in a while but the cost of Nokia’s dividend was 749 million Euros in 2011. The company announced at the end of 2011 that the company’s restructuring of Nokia Siemens Networks annualized operating expenses and production overhead was to be cut by 1 billion Euros by the end of 2013.  Obviously Nokia needs to ramp this cost cutting up by much more.  Much much more.

Nokia acquired NAVTEQ for some $8.1 billion for its GPS assets. The company has three large groups: Devices & Services; Location & Commerce; and Nokia Siemens Networks. Nokia’s preliminary 2012 CapEx budget was 650 million Euros and that compared to 597 million in 2011 and 679 million in 2010. Nokia recently sold its Vertu luxury phone brand for an undisclosed sum, but it did reportedly maintain a 10% stake in the outfit.

The balance sheet is shown to have a net tangible assets of $7.3 billion.  The total equity considering the intangible assets is listed as $15.4 billion.  These figures are supposed to include the value of the plant, property, and equipment.  So, what are the real values here, at least in theory for how the market values Nokia $9.3 billion? The net cash is somewhere around $6 billion, assuming that it has not eroded.

Patents at 5 years … $3 billion

GPS from NAVTEQ… $2 billion based upon long-term value erosion from Google, Apple, etc.

Short term assets/liabilities… Properties, plants, and equipment worth about $2.3 billion on the books… Fire sale value is likely far less, so call it $1.5 billion. Receivables, inventory and other current assets are close to $19 billion, while current liabilities are over $22 billion. We cannot say that these are balanced but for this case we will treat it at equilibrium.

Nokia’s 2011 annual report claimed more than 5.5 billion Euros in “Contractual Obligations” from 2012 to 2016 if you tally up the long-term liabilities, operating leases, and purchase obligations.  It is worth noting that 2.259 billion Euros of that figure are due in 2012 under purchase obligations.  We cannot tabulate this figure today, but what if Nokia could cancel half of those obligations?

If you tally everything up, there is no screaming valuation here to hang your hat on.  The market capitalization of $9.3 billion is already between the net tangible assets and the total shareholder equity.  Maybe Nokia can realize more from its patents and other assets and maybe Nokia can do its best to limit its liabilities.  Still, the balance of over 100,000 workers is at risk and there does not seem to be any hidden upside here after looking at the numbers.

Nokia is a turnaround situation where the underlying value just doesn’t seem to hold any truly hidden gems for investors.

JON C. OGG

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