Ericsson notes nearly US$3 billion impairment charge on Vonage

ERICSSON expects to record an impairment charge of nearly US$3 billion in the third quarter, citing higher interest rates and a slowdown in the Vonage business it bought for US$6.2 billion last year. The US-traded shares fell as much as 3.7 per cent on the news.

The Swedish maker of mobile networks noted a “significant drop in the market capitalisation of Vonage’s publicly traded peers” in a disclosure of the charge late Wednesday (Oct 11). The company said it continues to believe, however, that the business “remains critical” to its enterprise strategy

The charge only stands to ratchet up pressure on chief executive officer Borje Ekholm to justify his company’s acquisition of Vonage. The managing partner of activist investor Cevian Capital, Lars Forberg, recently said that the deal “added nothing” from a strategic or financial perspective. Late last year, Cevian also called out Ericsson’s earnings as “disappointing” and urged the company to “drain the swamp of losses”.

The company also reported preliminary net sales of 64.5 billion Swedish kronor (S$8 billion) for the third quarter, a 5.2 per cent decline from the previous year. Network sales in North America were down 60 per cent from a record a year earlier.

“We, like many in the market, have been speculating about this event for a longer period, ie since the acquisition was completed,” said Daniel Djurberg, an analyst at Svenska Handelsbanken. “There is one less element of uncertainty.” Djurberg added that this writedown was a “healthy sign” and that he expected Ericsson to trade up in the coming months to a year.

Ericsson, one of the world’s biggest providers of 5G networking equipment, has vowed to adjust prices and find ways to improve margins. The company, along with its peers, are struggling as the global market for networks and the gear that handles mobile communications is stagnating.

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Last month, Ekholm laid out a plan to create a portal with Deutsche Telekom for APIs, interfaces that allow different applications and systems to communicate with one another, through Vonage. Ekholm estimated at the time that the market was worth US$20 billion and said the effort is critical to helping operators turn a profit from their network investments. BLOOMBERG