Why Does Ericsson Want to Merge Its Fiber Services Business?
Focus on cost-cutting
In the previous part of this series, we saw that Ericsson (ERIC) is looking to sell off its loss-making business units to improve its profit margins. Recently, it announced that it’s looking to merge Abentel with a local company. Abentel is Ericsson’s Spanish-based fiber services business unit that it acquired in 2016 in a deal estimated between 20.0 million and 30.0 million euros.
Abentel was acquired to enhance Ericsson’s end-to-end fiber services. Ericsson had estimated the demand for fiber optic services to grow and accommodate bandwidth requirements, especially in video services.
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Ericsson also aims to reduce its exposure in network rollout and maintenance services since the segment has high labor costs and requires a higher-paid employee base. Telecom (telecommunications) operators have historically outsourced these services to equipment companies such as Nokia (NOK), Ericsson, and Huawei.
Ericsson looking to sell media business
Earlier this year, Ericsson announced its intention to sell its Media segment. Morgan Stanley (MS) was appointed to identify opportunities and explore the sale of the segment, and Goldman Sachs (GS) was hired to find a potential buyer.
Revenue from Ericsson’s Media segment has been falling, driven by a decline in legacy products. In the above table, you can see that revenue from the Media segment fell more than 16.0% year-over-year in 1Q17 to 2.0 billion Swedish kronor, while its operating margin was -51.0%. Ericsson is now reporting revenue from its Media segment in its Other segment and not as a separate business unit.