Ericsson announced two major developments with its media operations: (1) the sale of a majority interest of 51% in its Media Solutions Business to private equity firm One Equity Partners; (2) and its decision to maintain ownership of Ericsson’s former Broadcast and Media Services, which was renamed Red Bee Media in November 2017.
The Media Solution Business comprises Ericsson’s compression and PayTV product portfolio built in part through the acquisitions of Tandberg Television (2007), Microsoft Mediaroom (2013), Fabrix (2014), Azuki Systems (2014), and Envivio (2015). Full year revenue for the Media Solution Business is around 3 billion SEK or approximately $380 million USD.
Red Bee Media encompasses Ericsson’s managed services portfolio in the broadcast sector, which was built in part through the acquisitions of Technicolor’s Broadcast Services (2012), Red Bee Media (2013), and FYI Television (2016). Annual revenue for Red Bee Media is approximately 3.5 billion SEK or around $444 million USD.
These announcements came after a nearly nine month evaluation of strategic alternatives for the businesses. The initial announcement was made shortly before the 2017 NAB Show in March of last year.
Challenging operating performance for these businesses was also initially disclosed in early 2017. It continued. Ericsson’s Q3 2017 financial results showed a segment operating margin of -77% for the year-to-date nine month period in the Other segment where the Media Solution and Red Bee Media businesses were reported. Further financial information indicated Media Solution and Red Bee Media represented around 75% of the sales reported in the Other segment during the third quarter of 2017. In the most recent announcement, Management stated substantially improvements had been made during 2017, especially in regards to margins.
During its conference call with analysts, Ericsson indicated adjusted operating income for Red Bee Media was approximately -38M USD for 2017, though “steering towards breakeven.”
While improved, the Media Solutions business operating losses remained “substantially higher” than Red Bee Media in 2017.
The majority sale to One Equity Partners is anticipated to close in the third quarter of 2018. As outlined in the public statements, at the time of closing employees, contractors, and specified assets and liabilities will transfer to the new company. Since Ericsson is retaining a 49% ownership position, the Company will continue to report its portion of profit and loss in its financial statements. No financial terms of the transaction were provided.
The decision to retain Red Bee Media was reached after considering a variety of alternatives. While Ericsson disclosed it receive bids for Red Bee Media, Management concluded these bids did not reflect the value of the business. In fact, Management stated in its public remarks that “upside from continued development was deemed to be significant.”
Several factors associated with the transaction are worthy of emphasis. These combined businesses represent around 3% of Ericsson’s annual revenue. While not significant assets in the context of Ericsson, these are considerable product and service portfolios in the global media technology sector.
The press releases announcing the strategic initiatives admonish several statistics highlighting the significant footprint of these businesses, among these almost 4,000 combined employees and a tier1 list of media customers. The consideration of their customers was apparent in Ericsson’s decision making. In fact, Ericsson’s President and CEO Börje Ekholm made explicit reference to this in the press release, stating “We are confident that the direction we announce today will enable us to create the best long-term value, for both our customers and our shareholders.”
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