Flextronics Takes Over Motorola Ops

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As announced earlier (Dec 2012), electronic product contract manufacturer, Flextronics International Ltd. (FLEX) recently completed the acquisition of certain assets of Motorola Mobility LLC, a division of Google (GOOG). The deal makes Flextronics Motorola’s biggest outsourcing partner.

Flextronics acquired Motorola’s manufacturing facility, equipment and employees in Tianjin, China and Jaguariuna, Brazil for an undisclosed amount. 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. Flextronics is expected to provide further details of the transaction at its upcoming fourth quarter conference call scheduled on Apr 30.

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 Aug 2012, Nokia Siemens Network signed a contract with Flextronics to open an assembly line in Brazil.

Moreover, Flextronics will acquire a highly trained and skilled, ready-to-deploy employee group, which will save a lot of time and training resources, in our view. We believe that the Motorola facility acquisition will further drive its growth prospects over the long term.

In May 2012, Google acquired Motorola Mobility for approximately $12.5 billion. Since then the company has been looking to divest the unprofitable part of the business to save costs and the current deal is a part of that broader strategy.

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 going forward.

Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term. Further, increasing competition from Jabil Circuit (JBL) and Plexus Corp (PLXS) remains a concern going forward.

Currently Flextronics has a Zacks Rank #3 (Hold).

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