Telecom Vendors

Nokia reportedly selling its undersea cable unit Alcatel Submarine Networks

Finland’s Nokia plans to sell its undersea cable unit, a business that underpins the global Internet, two union sources and a French government source told Reuters.

The division, valued at about 800 million euros ($870 million), is one of the top suppliers of undersea cable networks in the world and was bought by the telecom equipment maker last year as part of its 15.6 billion euro ($17 billion) acquisition of French rival Alcatel. It has been run as a standalone business and it is known as Alcatel Submarine Network (ASN). Nokia had previously tried to sell the unit in 2014 but cancelled those plans.

ASN is one of the two standalone businesses that Nokia runs. The other is the Radio Frequency Systems (RFS). Although these businesses are not part of Nokia, the company reports the results of these in its consolidated results. However, Nokia does not provide specific details of these segments. As a result, it is difficult to assess the financial impact and contribution of these businesses.

Only last year, Nokia conducted tests to double the speed of cable transmission capacity and the management was quite bullish about the prospects of the segment in the next 2-3 years. According to different estimates, there were going to be about $8.1 billion worth of cable deployments in the next three years.
ASN being the leader in this segment (it had around 47% of the market share) would have benefited from this growth opportunity. In 2015, only three networks worth $490 million were deployed. Compare this to the potential 33 networks to be built in the next three years that could be worth $8.1 billion, and the opportunity looks massive.
On the other hand, when we look at the structure of the business, it becomes clear that Nokia might have never wanted this business at all. It has tried to integrate all the other segments of Alcatel-Lucent into its own. However, this segment was kept as a separate business from the start. It indicates that the company wanted to keep it as a separate asset and sell it at an opportune time. ASN does not complement Nokia's core business of mobile and fixed networks.

ASN provides high-speed connectivity with African countries and overseas territories. Also, it is important for national security and cyber-surveillance. Whenever the words ‘national security’ come into play, business becomes a little bit tricky.

If ASN is considered a strategic asset for the French and the government pokes its nose into operations, then it becomes a hassle for the company. This might have played a role in Nokia deciding to keep it separate and eventually selling it.
However, the sale is not imminent and it might not be a smooth transaction. The French government will certainly want to be involved in the sale procedure and would most likely want to review the buyer. It might take some time to find a suitable buyer that can satisfy all the parties.

ASN is valued at around $870 million. It will be a nice cash injection to an already strong financial position of the company. Since Nokia does not give numbers for the business division, it is not possible to value the transaction. Hence it is difficult to comment whether this is a good price for the company. This division has 1,000 employees and since the results are consolidated, it might also be part of Nokia's plan to reduce costs.

The company is still talking with the government behind closed doors about their wish to sell the business. It is likely going to be a lengthy process, and due to its strategic importance for France, the process will not be as smooth as selling a part of business. This all looks like Nokia's continued efforts to become a leaner and more efficient business and focus on its core networks business.

Nokia's core business still remains under pressure and we are unlikely to see any major movement in the short term. However, Nokia's efforts to become a leaner operator and strengthening of financial position through non-core asset sales such as ASN will give it a better platform to grow. These cash inflows can be diverted towards new business acquisitions. Nokia might want to add some complementary businesses with high gross margin in order to enhance its metrics as it waits for the networks market to pick up. Sale of ASN will be good for the company and it makes Nokia an even better pick.