Motorola credit downgraded to ‘junk’ status
Motorola last week saw its credit rating downgraded to “junk” status by Standard & Poor’s, a move that could limit the vendor giant’s financial flexibility as it tries to rejuvenate itself.
As has been the case for the past two years, Motorola’s problems stem from its struggling mobile-devices unit, which continues to lose market share in the highly competitive handset arena, which is being hampered by a global economic downturn. In a research report, Standard & Poor’s credit analyst Bruce Hyman stated the downward trend is “not likely to be reversed over the intermediate term, leading to depressed profitability and returns, adjusted debt leverage over 4x and substantially diminished free cash flows.”
In a statement, Motorola disputed the ratings downgrade, claiming that the action “undervalues the strength of the company’s balance sheet and the substantial efforts underway to improve the company’s profitability.”
Both Hyman and Motorola noted that the other half of the company’s business—the portion that includes public-safety communications—is healthy, but it is not enough to overcome the 31% revenue drop that the mobile-devices unit suffered during the third quarter, when the company reported a $397 million loss.
Early this year, Motorola announced a plan to separate the two business units, a strategy that could help the company’s government communications business, according to mobile wireless consultant Andrew Seybold.
“If this is all about their handsets, maybe it’s time for them to just spin [the mobile-devices unit] off and be done with it, because my understanding is that their LMR group is making money,” Seybold said during an interview with Urgent Communications.
But Motorola co-CEO Sanjay Jha has said plans to separate the business units are on hold and that the problems in the mobile-devices portion of the company likely would not be resolved until at least 2010. Until then, a spinoff of the struggling unit would fail, said Roger Entner, vice president of communications for IAG Research.
“If you were to spin it off right now, the handset division would not be viable—it’s losing too much money right now,” Entner said during an interview with Urgent Communications. “Splitting it right now would let it run into the ground.”
Meanwhile, the outlook for Motorola is bleak, Entner said.
“It’s losing money as we speak, and it’s only a matter of time until they have to raise money,” he said. “In the best of times, a company with a junk-bond rating has to give a higher yield. In the worst of times, as we have right now, it can make it extremely difficult—if not impossible—to get funding. And if you do, you often have punitive interest rates. It’s a bad time to have a junk-bond rating.”