Ericsson under pressure with handset joint venture

As analysts become concerned that Ericsson’s moves to improve its profitability might not work, Ericsson’s CEO Kurt Hellstroem has indicated he won’t continually fund its handset joint venture with Sony if its products aren’t well received in the market.

“We’re committed to the joint venture and think it’s important,” said an Ericsson spokeswoman who confirmed Hellstroem’s statements. “But as with any business, we will evaluate it.”

The joint venture, formed in October, is one of Ericsson’s largest liabilities. In January, it entered into a guarantee for half of any amount drawn under a $295 million credit facility. Those covenants require Ericsson’s net debt not to exceed $4.5 billion and its payment readiness to be $3 billion. The Ericsson spokeswoman said the company has about $490 million in reserve to fund the joint venture next year if it’s needed. Sony isn’t holding Ericsson accountable for that amount just yet, despite that its equity-to-assets ratio has fallen below 30%--which, under the terms of the joint venture agreement, would require Ericsson to contribute that money next year.

Ericsson is not contributing additional capital to the joint venture this year. A new series of Sony Ericsson handsets are expected to enter the market before the end of the year. This week, Gartner ranked Sony Ericsson as the fifth largest handset maker with a 5.4% market share in the second quarter. Ericsson once stood as the third largest.

In related news, Ericsson said it would hire an outside firm to handle nearly all of its information-technology operations. As a result, the company plans to cut another 4000 positions. The decision is part of the troubled vendor’s efficiency program to generate enough cash to pay off its massive $3.2 billion debt.