Electronic product contract manufacturer,
Flextronics International Ltd. (
recently announced an agreement with Motorola Mobility LLC to
acquire the latter's manufacturing facility and equipment in
Tianjin, China and related equipment in Jaguariuna, Brazil for an
undisclosed amount. The deal is expected to be completed by the
end of first half of calendar year 2013.
In May 2012,
acquired Motorola Mobility for approximately $12.5 billion. The
current deal reflects Google's strategy of downsizing Motorola's
existing operations in order to save cost. The deal will make
Flextronics Motorola's biggest outsourcing partner.
Currently, Flextronics serves both Google and
Apple Inc. (
. We believe that Flextronics is well positioned to benefit from
the growing rivalry between these two companies over the long
Flextronics expects the deal to be accretive on both operating
income and earnings per share basis for fiscal year 2014. Revenue
potential is expected to be of several billions and operating
margin remains within the target range for its High Velocity
Business segment. The company expects to earn a return on
invested capital ("ROIC") of 20% going forward.
Flextronics announced that the two facilities, along with
equipment and assets are worth approximately $75.0 million and
the company is not paying any premium for these items. Moreover,
Flextronics will acquire a highly trained and skilled
ready-to-deploy employee group, which will save it a lot of time
and training money, in our view.
We believe that the deal will be significantly beneficial for
Flextronics as it will help in expanding the company's
manufacturing capacity in the low cost regions of China and
Brazil. Notably, in August this year Nokia Siemens Network signed
a contract with Flextronics to open an assembly line in
Acquisitions have been an integral part of Flextronics' growth
story. Although most of the acquisitions were that of start-ups
and small companies, they helped Flextronics to expand its
presence in the communications, medical, infrastructure and
automotive sectors. We believe that the Motorola facility
acquisition will further drive its growth prospects over the long
However, Google's intentions regarding the Motorola hardware
operations are not very clear. The search giant has already
announced its intentions of exiting the entry-level low-margin
handset business and focusing on high-end smartphones, where
Motorola used to have minimum presence.
We believe that this uncertainty related to Google's motive
over Motorola's handset manufacturing business will be a
significant headwind for Flextronics going forward. If Google
suddenly decides to wind up the whole business, both the current
facilities will become idle (currently they will only manufacture
Motorola handsets), which will hurt Flextronics' top-line growth
Moreover, macro-economic concerns and weak end-market demand
are the other major concerns in the near term.
We have an Underperform recommendation on Flextronics over the
long term. Currently, Flextronics has a Zacks #4 Rank (Sell).
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