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Ericsson Moves Closer to Media Business Sale – Report

Iain Morris

Ericsson is said to have hired two banks to explore a sale of its media business after hinting at a possible divestment of the ailing unit earlier this year.

The Swedish equipment vendor is working with Morgan Stanley on a sale of its media solutions assets and with Goldman Sachs to find a buyer for the broadcast and media services unit, according to a report from Bloomberg that cites sources with knowledge of the matter.

Private equity firms as well as other media and technology businesses have apparently expressed interest in acquiring Ericsson's media assets, according to the same Bloomberg sources.

Ericsson AB (Nasdaq: ERIC) said it did not comment on rumors and speculation when approached by Light Reading for its reaction to those reports.

But the news comes after CEO Börje Ekholm said in March that Ericsson was exploring "options" for its media and cloud hardware assets and that it would double down on its core business of selling network equipment and services as part of a new strategy aimed at restoring profitability. (See Ericsson Tightens Focus, Warns of $1.7B Q1 Hit and Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle.)

Ericsson has been near crisis mode for more than a year following a series of earnings disappointments that triggered the departure of former CEO Hans Vestberg last summer. (See Ericsson Ejects CEO Vestberg and Beginning of the End for Ericsson?)

Having taken charge of the company in January, Ekholm is faced with a shrinking addressable market together with unrelenting competition from China's Huawei Technologies Co. Ltd , which last year overtook Ericsson to become the world's biggest supplier to communications service providers. (See Ericsson Appoints Investor AB's Ekholm as New CEO.)

Signs of a turnaround at Finnish rival Nokia Corp. (NYSE: NOK) have piled further pressure onto Ericsson. (See Nokia Turnaround Gathers Pace, Shares Rise.)

Ekholm has said his priority is to restore profitability at the company, which saw its net income tumble to just 1.9 billion Swedish kronor ($220 million) last year from SEK13.7 billion ($1.56 billion) in 2015.

The goal is to boost Ericsson's operating margin to about 12% from its level of 6.2% (excluding restructuring charges) in 2016.

But there has been concern that Ekholm is too focused on cost cutting and does not have a growth strategy for the company, prompting ratings agency Moody's to downgrade Ericsson to junk status in May.

Revenues across the entire business fell by nearly a tenth last year, to SEK222.6 billion ($25.4 billion), and by nearly 7% at the media business, to about SEK9.7 billion ($1.1 billion).

Yet while the much larger networks business at least remains profitable, the operating loss at the media unit widened from SEK1.2 billion ($140 million) in 2015 to about SEK2.4 billion ($270 million) last year.

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The media solutions part of that business produces tools and platforms for delivering video services on different devices, while broadcast and media services supports content providers on scheduling and audience development.

As with some other parts of the Ericsson empire, the company's media business appears to have been stitched together from a number of takeovers in the last few years, including the acquisition of UK-based Red Bee Media in 2014.

Despite previously forming one of Ericsson's target growth areas, the media business has struggled to become a serious force in what is a highly competitive market.

Power modules sold to Flex
Separately, Ericsson revealed that it had agreed to sell its power modules business to Asian electronics company Flex.

The power modules division designs and makes power supply products for IT and communications equipment, including basestations, switches and routers. It includes Shanghai Ericsson Electronics Corporation, a manufacturing site in China, as well as business assets in Sweden.

About 300 of Ericsson's employees currently work at the power modules division. Ericsson had about 111,500 employees in total at the end of last year.

The financial terms of the agreement were not disclosed but Ericsson said the divestment also tied in with its strategy of focusing on fewer critical business areas in future.

"In line with our strategy, we are focusing our business on fewer core areas," said Christian Hedelin, the head of strategy and business area networks for Ericsson, in a company statement. "The power modules business is a perfect fit for Flex, and we look forward to working together to ensure a smooth transition and a lasting relationship."

Ericsson expects the deal to close in the third quarter of this year.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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