Marconi has been seeking a buyer since it was left out of BT Group plc's (NYSE: BT; London: BTA) next-generation network plans, announced in April this year. (See Marconi in Turmoil.)
Huawei Technologies Co. Ltd. was the first name linked with a possible takeover, while Alcatel (NYSE: ALA; Paris: CGEP:PA) was also named recently as a potential suitor. (See Marconi Rises on Sale Talk.)
But Ericsson emerged as the favorite after Light Reading broke the news that Marconi insiders saw the Swedish vendor as the most likely buyer. (See Sources: Ericsson Mulling Marconi.)
Ericsson is buying the following Marconi units:
- Optical transmission equipment
- Broadband access and fixed wireless access
- Data networking and associated services, mainly based in the U.S.
- Non-U.K. services business, including Value Added Services activities in the Middle East and Wireless Software Services.
These businesses account for about 75 percent of Marconi's revenues, which in the most recent full financial year (to March 31 2005) were £1.27 billion ($2.24 billion). Ericsson says the deal will add £1 billion ($1.77 billion) to its annual revenues, and that the acquisition will not impact its earnings in 2006 before adding to net income in 2007.
In a prepared statement, Ericsson CEO Carl-Henric Svanberg said: "The acquisition of the Marconi businesses has a compelling strategic logic and is a robust financial case. As fixed and mobile services converge, our customers will substantially benefit from this powerful combination."
He added: "Ericsson and Marconi know each other well and have had a successful partnership for over 10 years. Both companies have a rich history of innovation that has brought many of the technologies to market that are commonplace in our lives today. We look forward to welcoming so many of Marconi's talented employees to Ericsson."
The CEO later added that the acquisition is tax deductable for Ericsson, and should lead to about £330 million ($589 million) in tax savings.
Analysts at Lehman Brothers regard the move as "slightly positive" for Ericsson, "as long as integration is as smooth as management expect."
In a research note issued this morning, analyst Tim Luke notes that Ericsson will benefit from taking control of Marconi's optical equipment, which it already resells, and its next generation wireline products, such as the IP DSLAM and softswitch.
Luke also notes that Ericsson should benefit from Marconi's carrier relationships, particularly BT, Telecom Italia SpA (NYSE: TI), O2 plc (NYSE/London: OOM), Telstra Corp., and Vodafone Group plc (NYSE: VOD).
Marconi CEO Mike Parton summed up the combined might of Ericsson's wireless business and the Marconi assets in one simple sentence: "All the competition should be really scared!"
The remaining 25 percent of the British firm, predominantly the U.K. services business, will be retained by Marconi's shareholders, who will receive 275 pence in cash per share in the first quarter of 2006.
Marconi says this business generated revenues of £336 million ($594 million) and an operating profit of £37 million ($65.4 million) in the most recent full financial year. It will be renamed Telent plc, and will be Ericsson's preferred services partner in the U.K.
This relationship should help Ericsson as it builds out the intelligent nodes at the heart of BT's next-generation network, the 21CN. (See Ericsson to Bring Partners to 21CN Party.)
Telent will retain the net cash held by Marconi on December 31 this year -- it was £275 million ($486 million) on September 30 -- and will also retain responsibility for Marconi's pension plan, which will receive a cash injection of £185 million ($327 million). And once the deal is completed, a further £490 million will be placed in an escrow account to cover any future pension liabilities.
Marconi's shareholders will vote on the deal at an Extraordinary General Meeting, due to be held on December 21. Completion is expected by the end of January 2006.
The news sent Ericsson's share price up by 0.3 Swedish Kronor, more than 1 percent, to SEK26.50. Marconi's share price is also higher, by 17 pence, nearly 5 percent, to 368 pence on the London Stock Exchange.
— Ray Le Maistre, International News Editor, Light Reading