Ericsson to buy most of Marconi for $3bn

STOCKHOLM/LONDON - Swedish telecoms equipment giant Ericsson is to buy fallen rival Marconi for 16.8 billion crowns (NZ$3.03bn) to meet an expected boom in demand for fixed and mobile broadband internet.

Ericsson, the world's top maker of mobile phone network equipment, said the deal would help it to supply telecoms firms providing broadband internet and services in the home, office or on the move.

Marconi, which nearly collapsed when the internet bubble burst in 2000, rebuilt its business around transporting voice and data over medium to long distances via optical switches. It was thrown into turmoil again in April when it lost a contract from its principal client BT.

Ericsson, meanwhile, dominates global sales of radio access equipment. Both firms have come a long way since Italian Guglielmo Marconi sent his first wireless message and Lars Magnus Ericsson began an electro-mechanical repair shop in 1876.

"The acquisition of the Marconi businesses has a compelling strategic logic and is a robust financial case," said Ericsson Chief Executive Carl-Henric Svanberg.

Svanberg said Ericsson would need to reduce the 6,671-strong workforce it was taking from Marconi by over 1,000 people.

Ericsson shares are up 25 per cent this year, outperforming the 12 per cent higher DJ Stoxx Technology index, while Marconi shares have dropped 35 per cent.

Ericsson said most of the cost of the deal was for intangibles such as brands, trade marks and patents, showing the value of the Marconi name despite having fallen on hard times.

In pounds sterling, the purchase price was 1.2 billion, of which Marconi said it would return 577 million to shareholders. About 185 million will go to meet the firm's pension deficit, and Marconi is setting aside another 490 million in an escrow account to meet future pension-related needs.

Several Ericsson rivals such as Siemens, Alcatel and Chinese newcomer Huawei were also rumoured to be interested in Marconi.

BETS ON BROADBAND

"There's room for consolidation in this industry, and this may signal the beginning of more," said Theo Maas, fund manager at ABN Amro Asset Management, which has 30 billion euros of assets.

But Svanberg at Ericsson said the Marconi deal did not necessarily signal more. "This is not the beginning of a major trail of acquisitions. We have always done bolt-on acquisitions, and this should also be seen as part of those."

Formerly the GEC industrial conglomerate, Marconi only survived the internet bust when creditors forgave 4 billion pounds worth of debt in return for 99.5 per cent of the company. It relisted its shares in May 2003 with a market value of about 590 million pounds.

"It is positive for Ericsson. It strengthens their product and market presence in areas where they are not too strong today," said Johan Strandberg, SEB Asset Management analyst.

WestLb analyst Thomas Langer warned of pitfalls.

"I think it will not be a very easy exercise here to really grow business with fixed-line carriers ... I am a bit surprised that Ericsson obviously is willing to take the bull by the horns and ... re-enter that market."

But five years after the end of the internet bubble, Ericsson said the best was yet to come. "The upgrade to broadband will lead to a massive increase in data traffic ... Transmission capacity in telecoms networks will have to be dramatically increased," it said.

Similar hopes in 1999 and 2000, long before broadband became popular, led to overinvestment by operators and a boom-bust in which Ericsson also nearly collapsed.

STEP BACK

While Marconi, Britain's last remaining telecoms equipment maker, took another step back when it lost the BT contract this year, Ericsson has retained its global lead in mobile systems as operators built their first high-speed wireless networks for mobile broadband services.

Ericsson, which halved its workforce in the downturn, said buying Marconi was an "emotional moment".

"Marconi invented the radio and that is ... the reason we all are here," Svanberg said.

What is left of Marconi after the deal, expected to be completed by the year-end, will be called Telent, which will provide services to telecoms operators and other companies. Telent will also retain Marconi's UK pension scheme.

Ericsson said the deal would add about 14 billion crowns (NZ$2.5bn) in sales, but would be earnings neutral in 2006 and positive from 2007.

Marconi Chief Executive Mike Parton said job cuts in the remainder of the group's business would not exceed 100. Telent is expected to have around 2,000 employees after the deal.

- REUTERS