Midday Commentary: Nokia bonds soar on $7 billion-plus phone unit sale to Microsoft

By Paul Deckelman

New York, Sept, 3 - Nokia Corp.'s bonds jumped in heavy early trading Tuesday on the news that the underperforming Finland-based telecommunications equipment and internet technology company will sell its wireless phone business - the company's major asset - to alliance partner Microsoft Corp. for €5.44 billion (about $7.18 billion).

Nokia's most widely traded bonds, its 5 3/8% notes due 2019, climbed some 10 points in early dealings to 105¼ bid, a market source said. Round-lot volume in the issue was more than $30 million and there were numerous smaller odd-lot trades. The bonds had traded in the mid-95 range last week.

Nokia's 6 5/8% bonds due 2039 zoomed some 15 points to 100¾ bid, on round-lot volume of over $10 million, as well as numerous odd-lot trades, from the mid-80s last week.

Nokia's New York Stock Exchange-traded shares leaped by as much as 43% from their $3.90 close Friday in the early going, and were still up by $1.51, or 38.65%, to $5.41 at 10:30 a.m. ET. Volume of 182 million shares was over 7.5 times the norm.

Under the terms announced jointly by Espoo, Finland-based Nokia and Redmond, Wash.-based Microsoft - Nokia's partner since February 2011 in developing the operating system that powers Nokia's phones such as its strong-selling Lumia line - Microsoft will acquire substantially all of Nokia's Devices and Services business, including the Mobile Phones and Smart Devices business units, associated production facilities and sales and marketing operations and related support functions, as well as various patents. A total of 32,000 current Nokia employees will transfer over to Microsoft, among them Stephen Elop, the former Microsoft executive who became Nokia's chief executive officer in 2010 and oversaw the alliance with his former employer; Elop will now return to Microsoft as an executive vice president in charge of the newly acquired division.

Convertible financing available

Microsoft will pay cash for the acquired operations.

According to Nokia's own separate company announcement, Microsoft has agreed to make immediately available to Nokia €1.5 billion of financing in the form of three €500 million tranches of convertible bonds to be issued by Nokia, maturing in five, six and seven years. It is at Nokia's discretion if it chooses to draw down all or some of these tranches. The financing is not conditional on the transaction closing. If the transaction closes, any outstanding bonds will be redeemed and netted against the deal proceeds by the amount of principal and accrued interest.

Nokia said that the first tranche matures in five years and has a 1.125% coupon payable semi-annually with an initial conversion price of €3.9338.

The second tranche matures in six years and has a 2.5% coupon payable semi-annually with an initial conversion price of €4.0851.

The third tranche matures in seven years and has a 3.625% coupon payable semi-annually with an initial conversion price of €4.2364.

Nokia's Board of Directors will separately assess whether to draw down some or all of this financing. If Nokia decides to utilize this financing option, the earliest that Microsoft could convert any of these bonds to shares is two years from draw down.

The unit being sold accounted for about half of Nokia's total revenues. Following the transaction, Nokia plans to focus on its three established businesses, each of which it described as a leader in enabling mobility in its respective market segment: NSN, a leader in network infrastructure and services; HERE, a leader in mapping and location services; and Advanced Technologies, a leader in technology development and licensing.

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