Ericsson encouraged to exit handset j/v

Credit ratings firm Fitch is backing Ericsson to exit its handset joint venture with Sony to alleviate concerns over future funding of the business.
 
The agency notes that Ericsson has already increased debt guarantees from 1.1 billion Swedish Krona (€120 million) to 2.1 billion Krona this year, and faces the prospect of further rises if the handset business continues to lose market share.
 
Sony Ericsson’s share of global device sales in 2Q11 was 1.7% - almost half the level it enjoyed in 2Q10, Gartner figures show. Fitch estimates the vendor’s revenue share experienced a similar drop, hitting 3.7% in 2Q11 compared to 7.6% a year previously.
 
While Fitch notes that Ericsson’s accounting methods mean it isn’t directly exposed to the joint venture’s “cash burn,” the parent will still have to cover increased debt funding to account for that spending. It notes the future isn’t rosy for Sony Ericsson, which “is an Android phone maker in an increasingly crowded environment. Differentiating itself has become more difficult.”
 
That difficulty is evident in an estimated 31% drop in device shipments during 2Q, which resulted in Sony Ericsson slipping into negative operating margins during the period. “These negative trends have caused the JV's cash to fall to €510 million, from €1,039 million in Q211,” the agency states.
 
Reports last week indicated that Sony is now considering buying Ericsson out of the joint venture, which would offer the Japanese firm clear benefits in terms of content distribution.
 
However, Fitch is less confident of Ericsson’s other joint venture – the ST-Ericsson chip business it operates along with STMicroelectronics.
 
“This JV has suffered badly in the past few quarters, driven by the rapid slowdown at Nokia. This has forced it to draw on short-term credit facilities provided by its parent, with this liability increasing to $445 million [€327 million] in 2Q11 from $150 million at year-end 2010,” Fitch notes.
 
The agency states the increased liability is “easily manageable for Ericsson,” but notes it has concerns over the venture’s long term viability “and its ability to continue to drain cash from Ericsson.”

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