STMicroelectronics NV (STM) will sell its stake in the unprofitable wireless-chip venture with Ericsson AB by the third quarter of next year to remove a drag on profitability at Europe’s biggest semiconductor manufacturer.
Chief Executive Officer Carlo Bozotti is discussing options for an exit from ST-Ericsson with the Swedish co-owner, Geneva- based STMicroelectronics said today. Ericsson continues to believe that the technology it contributed to the venture, formed in 2009, has “strategic value” for the wireless industry, the Stockholm-based company said separately.
Bozotti, refocusing STMicroelectronics’s business amid weakening demand and competition from Asia, is pushing to put chips in cars, video-game consoles and fitness machines as key mobile-phone customers Nokia Oyj (NOK1V) and BlackBerry maker Research In Motion Ltd. (RIM) struggle with a sales slump that has cut revenue at ST-Ericsson and led to losses for the venture’s parents.
“It makes sense for Ericsson to leave ST-Ericsson too,” said Janardan Menon, an analyst at Liberum Capital Ltd. in London. “Leading-edge modem technology is available outside of the venture.”
STMicroelectronics, working on cutting net operating expenses to a quarterly $600 million to $650 million by the beginning of 2014 -- compared with $900 million on average so far this year -- forecast its operating margins will grow to 10 percent “rapidly.” The company expects to improve its net cash position upon exit and will aim to maintain its dividend policy through the transition period, Bozotti said in an interview.
Shares of STMicroelectronics jumped as much as 8.8 percent and traded 4.2 percent higher at 5.21 euros as of 4:26 p.m. in Paris. The stock’s market value had shrunk by about 60 percent since Bozotti took over as CEO in March 2005 to 4.6 billion euros ($5.9 billion) as of Dec. 7.
Ericsson rose 1.6 percent to 65.85 kronor in Stockholm. The world’s biggest maker of wireless-networking equipment this year completed the sale of its stake in handset venture Sony Ericsson Mobile Communications to Sony Corp.
STMicroelectronics and Ericsson together injected $1.8 billion in cash and some wireless technologies into the venture in 2009. The Swedish company said its share of operating losses from ST-Ericsson totaled 9.5 billion kronor ($1.4 billion) as of end of September. ST-Ericsson had $39 million in cash as of Sept. 29 and net debt of $1.35 billion.
Ola Rembe, an Ericsson spokesman, said the company would “intensify the conversation” around finding a long-term solution for the venture.
ST-Ericsson’s net loss will be $900 million this year and $550 million in 2013, according to estimates by Sebastien Sztabowicz, an analyst at Kepler Capital Markets. ST-Ericsson reported a net loss of $841 million in 2011 and continued to be unprofitable during the first nine months of this year.
“We’ve all experienced unprecedented macroeconomic cycles in this market,” Bozotti said. “There’s been a major change in the dynamics of the wireless market and in our former major customers -- this is specific to our company, and the major reason that’s led us to take the difficult decision we are announcing today.”
STMicroelectronics had considered splitting itself by separating its analog and digital businesses, though the project didn’t win the full support of the board, people familiar with the situation said last month.
JPMorgan Chase & Co. (JPM:US) is advising STMicroelectronics on its strategy.
To stem losses, STMicroelectronics has so far moved to restructure ST-Ericsson. The unit announced plans in April to eliminate 1,700 jobs and transfer some product development to STMicroelectronics to trim costs.
European semiconductor makers have struggled to cope with the swings in prices and demand. They are losing market share to Asian and U.S. competitors, which have switched to so-called fabless models, dispensing with factories in favor of outsourcing to foundries such as those of Taiwan Semiconductor Manufacturing Co. (2330) The model allows chipmakers to adjust designs and production more quickly without the overhead of running their own plants.
“The market situation will remain weak this quarter and the next,” Bozotti said in the interview. “We expect improvement starting in the second quarter of 2013 on the macroeconomic level, and we’re betting on a wave of new products and customers for a recovery.”
STMicroelectronics’s full-year sales will probably shrink 12 percent to $8.48 billion on average, according to analyst estimates compiled by Bloomberg.
Bozotti declined to say today how the company’s new strategy and an exit from ST-Ericsson would affect jobs. The CEO said in October he will cut costs at STMicroelectronics by $150 million a year by the end of 2013, in a move that may affect as many as 500 positions.
The chipmaker, which is 27.5 percent owned by the French and Italian governments, may face political hurdles as it moves forward with job cuts. In France, Socialist President Francois Hollande and Industry Minister Arnaud Montebourg have pushed back against companies scaling down, with ArcelorMittal (MT) as the latest example. Montebourg in October hosted STMicroelectronics Chairman Didier Lombard at Bercy, France, to discuss strategy.
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