Ericsson Said to Be Considering Handset-Unit Joint Venture

In an attempt to salvage its beleaguered handset business, Ericsson (ERICY Quote - Cramer on ERICY - Stock Picks) is talking to Japan's Matsushita, maker of the Panasonic brand, about forming a consumer products joint venture, according to a report Friday in the French daily L'Agefi.

Ericsson, of Sweden, is the world's third-largest maker of handsets behind Finland's Nokia (NOK Quote - Cramer on NOK - Stock Picks) and Motorola (NYSE Quote - Cramer on NYSE - Stock Picks). But it has managed that segment of its business with a stunning lack of aplomb. Currently in its third year of handset struggles, the company reported a third-quarter operating profit margin of -29%, with worse to come. It has also said a return to profitability won't come until September 2001.

Clearly, Ericsson needs to take action, and a joint venture could qualify. L'Agefi said Ericsson would retain only a minority stake in any venture.

"We don't comment on these kind of rumors and speculations," says Michelle French, an Ericsson spokeswoman. "We continue to stand by our strategy, which is that we are an end-to-end solutions provider which means that we supply the networks and the phones, and we think that's an important part of our strategy."

Matsushita couldn't be reached to comment.

Discussions by analysts about the future of Ericsson's consumer products operation, which is comprised largely of the handset business, have inevitably centered around talk of the company either selling the operation outright or setting up a joint venture with an Asian manufacturer such as Matsushita or Sony (SNE Quote - Cramer on SNE - Stock Picks) that's strong in the consumer electronics area.

"I wouldn't rule this out," Johan Carlstrom, an analyst with Swedish investment bank Handelsbanken, said of the Matsushita report. "But it's too early to tell. I think this is just speculation so far." (He rates Ericsson a strong buy, and his firm hasn't done underwriting for the company.)

Should the deal happen though, Carlstrom thinks it would be a "very good situation for Ericsson and there would be a major rise in its share price." In that case, Ericsson could concentrate on its market-leading -- and profitable -- mobile infrastructure business.

Shares of Ericsson were off 25 cents, or 2%, at $12.25 Friday afternoon. They're down 54% from their 52-week high.

Ericsson said earlier this year that it's in the midst of a restructuring program to fix the handset business, with a projected return to the black in next year's third quarter. Some analysts believe Ericsson won't make a decision about a whole or partial sale of the handset business until it has a better sense of whether the restructuring will work.

The restructuring entails moving production from Sweden and the U.S. to lower-cost countries in Asia, Latin America and Eastern Europe, as well as the outsourcing the manufacture of some low-end phones, among other initiatives.