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Nokia May Need a Little Help From Its Friends

Can Nokia stay out of junk-bond territory? Standard & Poor’s and Fitch downgraded the Finnish mobile manufacturer this month—the latter to its lowest investment grade, with a negative outlook—amid concerns about its cash position. One way of easing the pressure on its rating might be to seek a helping hand from partner Microsoft.


Sure, Nokia’s current €6 billion ($8.6 billion) net cash pile gives it a cushion for this year. But the speed of the collapse in its handset sales and uncertainty over its new Windows-based smartphones, scheduled for launch by year-end, are spooking the ratings agencies. Credit Suisse believes the collapse in sales and margins will result in negative free-cash flow of €500 million in 2011. Along with €1 billion in restructuring charges, that could cut Nokia’s net cash to €3.75 billion by 2012.

Nokia says it doesn’t target a specific credit rating, but it does seek to maintain access to debt markets at all times. Losing investment-grade status would make that more difficult. A downgrade could force some bondholders without high-yield mandates to sell the debt. It could worry the group’s customers and suppliers and would likely inflict further pain on shareholders, already suffering from a 45% share-price fall this year.

Nokia is by no means in a critical position. It has some options. Its stake in Nokia Siemens Networks could be worth as much as $1 billion, although discussions with private-equity bidders have been dragging on for almost a year. Stopping dividend payments could save about €1.5 billion a year. Nokia could cut costs further, although it is already planning €1 billion in savings by 2013.

Another option might be to try tapping cash-rich Microsoft. If the U.S. software group could be coaxed into injecting capital, it wouldn’t only ease fears over Nokia’s cash position but would also signal confidence in the partnership. Nokia denies a full takeover is being considered, but neither group has ruled out Microsoft taking a minority stake.

Microsoft has a mixed record in hardware, as evidenced by the Zune music player. But Nokia is the software firm’s best shot as it tries to stay relevant in the mobile-software battle against heavyweights Apple and Google. If Nokia’s cash flow takes another turn for the worse, Microsoft may yet be tempted to put up some money to keep its mobile hopes alive.

Filed in: Technology News

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