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Motorola's break-up plan could hurt bondholders, analysts say Print E-mail
Friday, 13 November 2009

By Ronald Fink

Motorola’s reported plan to split itself into three parts instead of two could run into stiff opposition from bondholders, according to a research report published late Wednesday night.

While the company has long been expected to spin off its cell-phone business, the Wall Street Journal reported earlier on Wednesday that Motorola also plans to sell its division that manufactures set-top boxes for cable television companies and radios that go into cell-phone transmission towers. That would leave the company’s two-way radio business as a stand-alone, essentially breaking up the company into three pieces, analysts say.

Motorola was said to be asking $4.5 billion for the set top and radio business. And the New York Times on Thursday reported that the company planned to use the money to increase its cash balance and pay down debt.

But CreditSights analysts Zhiping Zhao and Jordan Chalfin wrote in their report that the expected sales price wouldn’t go far enough to satisfy both sets of stakeholders.

The division, called Home and Networks Mobility, is worth roughly $2.5 billion more than Motorola’s reported asking price based on its current profitability, the analysts observed. And they said the lower-asking price raises questions about how the company can meet the demands of both shareholders and bondholders, especially if the sale is part of a break-up that leaves most of the existing debt with the two-way radio business.

“It seems that the strategy will be to completely break up the company in order to maximize shareholder value,” Zhao and Chalfin wrote. They also said the sale of Home and Networks for significantly less than $7 billion, along with the divestiture of other assets, would be “very bad for bondholders.”

Even shareholders may not benefit much from a sale of the Home and Networks business at the reported asking price, the analysts added. “If the company can indeed find buyers for its assets and return cash to shareholders at a reasonable price, it could be positive for shareholders,” they conceded, but they added, a $4.5 billion price tag “is too low” based on its current profits.

Zhao and Chalfin acknowledged that the company may have a dimmer view of the prospects of the business than they previously thought. While the analysts’ estimate of the division’s value is based in part on its EBITDA for the last 12 months of roughly $950 million and profit margin of 11 percent, they said they doubt those earnings are sustainable in the long term.

Motorola management has evidently concluded they are unsustainable even in the near term. “The low price raises [a] serious question [as to] what the company believes its value is,” Zhao and Chalfin wrote.

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