STOCKHOLM – Swedish telecoms equipment maker Telefon AB LM Ericsson (ERICY) lost a quarter of its value on Monday after asking shareholders for almost $3 billion of new funds and warning it would not return to profit this year.
Ericsson's gloomy outlook, coming on top of a bigger than expected quarterly loss and pessimistic forecasts by rival Nokia (NOK) of Finland and Canada's Nortel Networks (NT), pulled down the battered technology sector by six percent.
Ericsson, dropping its previous target for a five percent operating margin this year, announced further job cuts totaling 20,000 over the next two years and unveiled plans to raise about 30 billion Swedish crowns ($2.9 billion) in a rights issue.
It now expects sales of mobile networks, in which it is world leader, to fall more than 10 percent this year, instead of less than 10 percent, and Chief Executive Kurt Hellstrom said he could not forecast a recovery for the foreseeable future.
"It is a gloomy report, but probably realistic. I don't know if the market will focus more on the cost-cutting measures, or if they will start to think about writing off the industry for a while," said Susan Anthony, analyst at Credit Lyonnais.
The news sent Ericsson shares down 25 percent to a five-year low of 26.6 crowns in Stockholm, wiping out some $6.75 billion of its market capitalization and sending shock waves through a sector unnerved by last week's disappointing Nokia outlook.
Nokia, which like Ericsson is a pure wireless play and its closest industry peer, lost 3.8 percent on Monday on the sector blues. Its share has fallen 20 percent since Thursday when it had to tone down its sales and market expectations for the full year.
France's Alcatel, which includes a battered fixed-line business, lost almost six percent, taking losses since the Nokia report to 12 percent. Germany's Siemens lost 5.4 percent and was down 11 percent since last week.
RIGHTS ISSUE FOR M&A
Ericsson said the rights issue, backed by its two largest shareholders AB Investor and AB Industrivarden, would give it the necessary cash to buy parts of other companies in the sector when the opportunity arises.
"This industry is going through restucturing, there will be opportunities, which, if you are financially strong, you could participate in," Hellstrom told Reuters.
"If you look at the telecoms industry... there are interesting parts, which could fit into the future product portfolio and we want to have that option."
Chief Financial Officer Sten Fornell told Reuters the issue, which he believed would be successful, would also help stave off any further downgrades of Ericsson debt ratings.
But Ericsson bond yields, moving in the opposite direction to price, rose sharply, suggesting higher borrowing costs for Ericsson, which made its first ever annual loss in 2001.
Investor and Industrivarden hold 67 percent of votes in Ericsson, but they have only seven percent of the capital, which means they would provide only two billion crowns of the expected 30 billion in the rights issue due by the end of September.
To get the remaining 28 billion, Ericsson will have to convince smaller shareholders the investment is worth their while, and with confidence in the sector running low, it can only do this by offering a deep discount.
"Will the share issue succeed? I think, yes. Are investors going to drag Ericsson through the thorn bushes first, again -- yes," a fund manager said.
NO MARKET CHANGE IN SIGHT
The Ericsson statement further illustrated the depths of the problems facing the mobile phone industry as cash-strapped operators rein in capital spending, while sales of handsets stall after years of runaway growth.
Nokia, the world's largest handset maker, warned last week that its group sales would grow by a maximum of nine percent this year, down from an earlier forecast of 15 percent, while U.S. company Motorola remains in the red.
"I think there's been a crisis of confidence in technology stocks for some time, it's just that it's taken longer to hit mobile phone stocks," said Paul Cooper, fund manager at Sarasin Investment Management.
China, which has long been the cork that kept the industry afloat last year, is now moving to slower subscriber growth and weaker than expected investments in conventional 2G networks.
The Americas, moving to European-standard GSM from rival U.S. technologies, are providing some relief for European players like Nokia and Ericsson. But this is not enough.
"With our revised view of the outlook for the market in which we operate we now expect to make a loss this year, excluding restructuring costs and non-operational items. With ongoing cost cutting we plan to manage the business to return it to profit at some point in 2003," Ericsson said in a statement.
Ericsson made a 5.4 billion crown pre-tax loss in January-March against market expectations of a 4.9 billion shortfall. Its sales were a weaker than expected 37 billion crowns and orders in the first three months dropped 40 percent.
On the bright side, Ericsson's mobile phone joint venture with Japan's Sony returned to a small profit in the first quarter, beating earlier forecasts of a small loss.
Like Nokia, Ericsson forecast the mobile phone market would sell 400-420 million handsets in 2002, the third year of flat sales units after years of runaway growth.