Ericsson has agreed to buy US-based wireless network provider Cradlepoint in a deal valued at $1.1 billion.
Shares are rising 1.8% in Friday’s pre-market trading. Ericsson (ERIC) said the acquisition is part of the Swedish telecom’s ongoing strategy to boost its market share in the rapidly expanding 5G space. As such, the deal with Cradlepoint provides Ericsson’s current 5G portfolio with access to tools that can connect devices using dedicated networks and global Internet of Things over a 4G and 5G platform.
The purchase price, which is funded from Ericsson’s cash-in-hand, will be paid upon full closure of the transaction. The acquisition, which is still subject to customary conditions, is expected to close before the end of Q4 2020.
As a result of the deal, Ericsson’s operating margins are expected to be negatively impacted by about 1% in 2021 and 2022 - where half is related to amortization of intangible assets which arise from the acquisition. Cradlepoint is expected to contribute to operating cash-flow starting in 2022. Ericsson added that the company’s 2022 financial targets remain unchanged.
"The acquisition of Cradlepoint complements our existing offerings and is key to our strategy of helping customers grow the value of their 5G network investments,” Ericsson CEO Börje Ekholm said. “Ericsson is uniquely positioned to build on Cradlepoint’s leadership position in Wireless Edge and the wireless WAN market. Combining the scale of our market access and established relationships with the world’s biggest mobile operators we are making a strong investment to support our customers to grow in this exciting market.”
The deal is expected to create “valuable new revenue streams” for customers by supporting 5G-enabled services for enterprise, and boost returns on investments in the network, Ericsson said.
As part of the terms of the transaction, Cradlepoint will become a fully owned subsidiary of Ericsson while continuing to operate under its existing brand. Cradlepoint employees will remain within the company and will be part of Ericsson’s Business Area Technologies & New Businesses.
Shares in Nasdaq-listed Ericsson have surged 26% so far this year with analysts maintaining a bullish Strong Buy consensus on the stock. That’s with a $11.80 average analyst price target indicating 7% upside potential lies ahead over the coming year.
Charter Equity analyst Edward F. Snyder wrote on July 17 “COVID notwithstanding, 2020 is playing out well for Ericsson.” He made the comment after Ericsson reported a $0.03 beat for the June quarter on strong 5G demand in North America and China. Impact from COVID-19 was minimal in the June period while demand for 5G equipment was strong in North America and China.
Management doesn't provide financial guidance, but according to Snyder, the company indicated September period (3Q20) revenue and EPS of $6.3B and $0.17 respectively, above consensus revenue and EPS estimates of $6B and $0.15.
The analyst continued: “The lumpy nature of network rollouts makes revenue timing difficult to predict, but between the timing of deployments in China, the U.S. and Europe and changes in the competitive environment, Ericsson's fortunes in 5G are improving and already off to a strong start in 2020.” (See ERIC stock analysis on TipRanks)