As Motorola Inc. (NYSE: MOT) prepares to split itself in half next year when a spinoff of its smartphone business is planned for the stock, some of the details are finding their way out into public. The two halves, one to be called Motorola Mobility and the other Motorola Solutions, do not get to divvy up MOT stock assets equally, according to a report in The Wall Street Journal.
Instead, the handset business, Motorola Mobility, will receive some $3-$4 billion in cash remaining after Motorola buys back its debt. The handset business has lost about $5 billion over the past three years as the company’s devices have not been able to compete successfully with the iPhone from Apple Inc. (NASDAQ: APPL) and phones using the Android operating system from Google Inc. (NASDAQ: GOOG). The Motorola Droid smartphone did use the Google Android OS, but with the release of the HTC Droid Incredible it is now an antiquated piece of technology.
To counter the losses in handsets, the company has dramatically cut expenses and finally produced a number of Android-based smartphones that are expected to lead the division to a profit by the end of the year. When the spin-off is complete, the Mobility company will include set-top boxes and cable and DSL modems as well as handsets.
Motorola Solutions will get whatever cash is left plus existing pension obligations and other liabilities. This division of the existing company currently generates nearly all Motorola’s cash from sales of public safety radios, handheld scanners, and telecom network devices. The division generated $11.1 billion in revenue last year. In the first quarter of 2010, the handset business, which has been improving, still lost $192 million.
Motorola plans to buy back nearly all the company’s $3.9 billion in debt from the nearly $8.5 billion in cash the company is currently sitting on. The company recently raised the buyback amount on an existing tender offer to $500 million. Overall this is a good thing because less leverage amounts to less risk. Motorola currently has a relatively high PE ratio of about 18 based on projected full-year earnings.
The benefits of the lowered risk and the spin-off as currently slated virtually all go to the handset group. The Solutions company with its steady flow of revenue and little or no remaining debt will benefit from lower borrowing rates and not having to support the handset business any longer.
