NEW YORK (Reuters) - Motorola Inc MOT.N will pump the bulk of its remaining cash into its handset and set-top box business when it spins off the unit in the first quarter of 2011, according to a Wall Street Journal story.
The story, which cited unnamed sources, also said that the company would buy back most of its debt, which stands at about $3.9 billion. It said the company would give the mobile phone unit $3 billion to $4 billion of its cash.
It will also leave the cellphone company, to be called Motorola Mobility, without pension liabilities and most other debts, according to the story.
This would leave the rest of Motorola, which caters to enterprise customers and sells network equipment to operators, with the remainder of its cash, its pension obligations and all its other liabilities, the Wall Street Journal said. That business would be called Motorola Solutions.
Motorola spokeswoman Jennifer Erickson declined comment.
The company’s cellphone unit has been struggling to compete with new smartphones and has not had a blockbuster phone since 2004. Its set-top box business suffered due to a weak economy and the wireless network equipment business was hit by a consolidation among telecom operators.
Analysts said it makes sense for its cellphone business, headed by Co-CEO Sanjay Jha, to get the bulk of the company’s cash and to be free from debt to help it in its turnaround.
“(Mobile devices) doesn’t need any debt, it needs a lot of cash to get through the transformation,” Fitch Ratings analyst Jason Pompeii said.
The idea behind buying back most of Motorola’s debt is to leave the separated entities with clean balance sheets that could make acquisitions or be bought, the paper said.
But both Pompeii and another analyst, Gerry Granovsky of Moody’s, raised doubts about whether Motorola would indeed buy back the bulk of its debt, which is expected to total around $3 billion by the end of this year.
Granovsky sees Motorola allocating the long-term debt to Motorola Solutions, which will be run by Co-CEO Greg Brown.
“I don’t think their plan is to buy back all the debt,” he said, noting that Motorola’s enterprise and network equipment business generates enough cash to support debt.
Unless the company has a big cash requirement, such as a share buyback or dividend payment, Granovsky said Brown’s unit may get its desired investment grade rating.
“We want to see one-to-one coverage of cash at that entity in order for them to have a credit profile that would be in line with an investment grade rating,” the analyst said. “Based on current assumptions, we think that’s enough. The factor we’re not sure of is the shareholder demand (for cash).”
Motorola, which had $8.5 billion cash at the end of the first quarter, has said publicly that it expects to end 2010 with roughly $3 billion in debt after paying back debt due this year and finishing a $500 million buyback.
Fitch’s Pompeii estimated that it could exit the year with about $7.5 billion in cash, leaving Motorola Solutions with roughly $3.5 billion assuming Motorola Mobility takes $4 billion of cash.
Motorola shares closed up 7 cents at $7.26 on Friday on the New York Stock Exchange.
Reporting by Sinead Carew in New York and Antonita Madonna Devotta in Bangalore; Editing by Valerie Lee, Phil Berlowitz