Ericsson is taking a $1.2 billion charge in a bid to write off its exposure to ST-Ericsson, adding to doubts over the future of the loss-making joint venture after partner STMicroelectronics said it was pulling out.
Ericsson (Stockholm, Sweden), the world's biggest equipment maker for mobile telecom networks, said on Thursday it would take the 8 billion Swedish crown hit in its fiscal fourth quarter in a move set to plunge it into a net loss for the three month period.
The Swedish group said it would not buy STMicro's (Geneva, Switzerland) 50-percent stake in the mobile chip making venture, confirming its previous indications and leaving the future of the venture's 5,000 employees staff looking uncertain.
Analysts think ST-Ericsson's wireless modem business could be attractive to a competitor like Samsung (Seoul, South Korea) and that Ericsson could retain its power management solutions business. But the rest of the venture's operations may just be shut down.
"Two thousand jobs are at risk whatever the scenario," said Jerome Ramel, analyst at Exane BNP Paribas. "If they just shut it down, it is even more."
Ericsson has been struggling recently with a slowdown in sales at its core network unit due to competition and a faltering global economy. In October it reported a 42 percent drop in third-quarter core earnings.
Profits have also been squeezed by its loss-making joint-ventures, mobile phone maker Sony Ericsson - which it has sold - and ST-Ericsson, which has not made a profit since it was formed in 2009 as key customer Nokia (Helsinki, Finland) struggled to compete in smartphones with the likes of Apple (Cupertino, USA) and Samsung.
Successive cost-cutting plans, including an April announcement of 1,700 job cuts and the transfer of some product development to STMicro, have failed to staunch its losses.
ON LIFE SUPPORT
STMicro said earlier this month it would quit the venture in 2013, handing responsibility for its future to Ericsson, which also wants to wash its hands of the unit so it can focus on reviving sales at its key networks unit.
Ericsson warned in October it might have to take a write down on ST-Ericsson, which has lost more than $1.5 billion excluding restructuring charges over the last three years.
"A writedown wasn't entirely unexpected given STMicro's plans," said one analyst who declined to be named, though he added that Ericsson's charge was larger than he had expected.
At 6.55 a.m. ET, Ericsson shares were down 2.9 percent at 6.00 a.m. ET, underperforming the DJ Stoxx 600 European technology index which was down 0.8 percent.
"Ericsson will continue to explore various strategic options for the future of ST-Ericsson assets," the Stockholm-based company said, while declining the comment on the details.
"To acquire the full majority of ST-Ericsson is, however, not an option."
The charge was mainly related to writing off loans to the joint venture, as well as funding for the business while its future is determined, Ericsson said.
Bengt Nordstrom, CEO of telecoms consultancy Northstream, said ST-Ericsson's future had looked bleak since Nokia chose U.S. software giant Microsoft (Seattle, USA) as a partner.
"Since then, it has been on life support," he said.
The average estimate for Ericsson's fourth-quarter net profit is 3 billion crowns, according to Reuters Starmine.
The firm last made a net loss in the third quarter of 2003.
($1=6.5388 Swedish crowns)
(Reporting by Simon Johnson; Editing by Mark Potter)