STMicro Departs Joint Venture; Better Late Than Never

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STMicroelectronics said on Monday that it indends to leave its unprofitable wireless joint venture, ST-Ericsson, under its corporate strategic realignment plan. The company is still discussing the terms of its exit and cannot provide many key details.

However, one thing is clear: STMicro’s departure from STE is long overdue; the joint venture has been losing ground (and investors’ money) right from . STE is built on the Nokia’s Symbian mobile OS, which saw its market share fall to 3% from 46% when STE began in 2009. STMicro’s struggle to maintain STE viable in front of a huge market share drop was an unbearable task leaving the company without resources it could not afford to lose.

The team behind STMicro hopes that its exit from the joint venture will be completed sometime by the third quarter of next year. The company’s management also provided some reviewed financial targets for the rest of its business, which, among other things, involve around $600 million-$650 million in operating costs, which is lower in comparison with $900 million at the moment, and post-extraction operating margins of 10%, without restructuring charges.

STMicro will also get a half of STE’s total losses until it completes its exit. However, these losses may grow further, taking into account that customers are less likely to make any substantial orders being uncertain about STE’s viability in the future.

Nevertheless, this will have many advantages for STMicro. The main thing to keep in mind is that STE’s losses were not at all ignorable. During January-September, the joint venture’s sales totalled $994 million, while its operating losses amounted to $717 million. While the restructuring process might turn to be painful, spilling money into a joint venture that incurs huge costs for another year would involve even higher losses.

On the other hand, analysts have not calculated any proceeds to STMicro in case of a sale to a third party or the liquidation of the joint venture, which means that in case STMicro still receives some cash, it would result in an upside to the current estimates. Moreover, STMicro will retain STE’s processor division, which represents the most useful portion of the joint venture received by STMicro in April under the terms of STE’s restructuring.

 

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