Last year was a bad one for this telecoms stock, but the sale of its handset unit could restore its fortunes. Paul Hill looks at what buyers would be prepared to pay in the current environment.
Motorola (NYSE:MOT)
Last year was a bad one for Motorola, a leader in the manufacture of mobile phones (52% of 2007 sales) and wireless networks. Its shares have halved since hitting $19.30 in October. The group has struggled to build on the success of its iconic Razr brand, which became the world’s top-selling device in 2006. Back then its share of the handset market was 23%; it has since fallen to 12.4% as rivals introduced more stylish phones, pushing Motorola into third place in the global rankings behind Nokia and Samsung. Profits have been decimated, and the group was forced into a painful restructuring to cut costs and lift margins.
So why do I think that the company is now a high-risk recovery play? Firstly activist investor Carl Icahn has muscled in and at the last count had amassed a 6.3% stake. Next a new chief executive Greg Brown, and chief financial officer Paul Liska have taken the helm, with the task of not only turning around the firm’s fortunes, but also looking at strategic options for its handset unit – which to me sounds as though it is up for sale. I reckon that separating the technology-led network unit from the more fashion-conscious handset unit makes perfect sense. So under a breakup scenario, who would be the potential purchasers and how much would they be willing to pay?
A number of parties have already been rumoured as buyers for the handset operation, which accounted for $19bn of Motorola’s $36.6bn in sales last year. Most of the speculation has centred on Asian manufacturers, such as ZTE of China, together with Samsung and LG of Korea. On the networks division, the likes of Nortel, Ericsson, Huawei, Cisco or even Nokia could be in the frame – so there is definitely no shortage of options.
With regard to pricing, I would value the networks division on an eight times underlying EBITA multiple (around $20bn) and the mobile unit on one times 2008 sales (or $15bn). Together with net cash of $4bn less around $2bn of restructuring costs, would generate a sum-of-parts valuation of about $37bn – equating to about $16 per share or 60% above current levels.
Motorola is not for the faint-hearted; competition is intensifying and the credit crunch may hurt break-up values. But with the long term picture for mobile communications still favourable, I rate Motorola as good value for the more adventurous investor.
Recommendation: high-risk recovery play – BUY at $9.56
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments