Could Ericsson Fall to a Private Equity Takeover?

Ericsson could be subjected to a takeover bid by Private Equity firms if its share price does not correct itself in the near future, says a new report from Per Lindberg, an analyst with Dresdner Kleinwort. He writes that "If the stock market does not realign its valuation with that of fundamentals, then Ericsson may become subject to private equity firms' increasingly audacious forays."

Their analysis shows that no more than SEK50 (US$7) billion of principal capital would be required to launch a staggering SEK400 billion takeover. Re-gearing of the balance sheet would free up some SEK150 billion; disposal of the 50% stake in Sony-Ericsson would release around SEK50 billion; borrowed funds from "yield-hungry/risk-seeking" banks would contribute SEK140-150 billion.

"On the basis of our forecasts, principal capital, capped at SEK50 billion, could jump by one order of magnitude (10x) over a period of 24 months." writes Per Lindberg.

An SEK400 billion takeover would be a small premium on the current valuation of the company at SEK395 billion - or some US$54 billion, and based on the potential returns - equity firms could probably afford to pay a decent premium to secure a swift victory in the takeover battle.

Based on Dresdner Kleinwort's forecasts, a re-modeled Ericsson would be able to capture an exit value of around SEK770 (US$106) billion by end of 2008. After repayment of loans and interest and adjustments for free cash flow in 2007 and 2008 (estimated at SEK65 billion), the private equity firms would be left with net proceeds of SEK580-590 billion - about US$80 billion.

Per Lindberg concludes, saying that "Our study shows that even in the most conservative of outcomes, represented by consensus' current view, private equity groups would be handsomely attracted to the 'Ericsson investment case'. Should our forecast scenario prove correct, then the promised returns, exceeding one order of magnitude, could become irresistible."

Posted to the site on 15th September 2006