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Ericsson shares plunge as £2bn rights issue is priced at 74% discount

Our City Staff
Saturday 20 July 2002 00:00 BST
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The telecoms equipment maker Ericsson priced a £2bn rights issue at a 74 per cent discount yesterday in a move to cut debt and help it through a period of weak demand, driving its shares down by nearly one fifth.

The world's biggest maker of mobile networks also announced its seventh straight quarter of losses and a further 5,000 job cuts as it struggles with weak demand amid a slow world economy.

Ericsson, which has been hit by the slump in spending by cash-strapped telecoms operators, said it expected a deeper fall in mobile network sales in 2002 than previously but still expected to return to profit in 2003.

Pricing the fully underwritten one-for-one issue at 3.8 Swedish krona ­ a price not seen on its stock since late 1992 ­ Ericsson at least removed one of the main elements of uncertainty hanging over the stock. But the deep discount sparked speculation that the underwriters had a pessimistic view on the business and would not offer more for the stock. It drove shares sharply lower and added to the gloom hanging over European stock markets.

"Such a discount is a sign of desperation," Inge Heydorn, an analyst at ABN Amro, said.

Michael Treschow, Ericsson's chairman, insisted the issue price reflected the best judgement of advisers to limit the danger of the issue failing on volatile stock markets. "I am risk-adverse, but not desperate," he said.

Ericsson shares fell 18 per cent to Skr11.90. The shares will drop to the fully diluted value of Skr7.7 at current market prices, once they go ex-rights on 9 August.

The company said it planned to repay Skr8bn of short-term debt and Skr14bn of long-term loans over the next six quarters out of the Skr30bn raised. It would first pay back loans where interest is linked to credit ratings.

Ericsson has already seen downgrades from Moody's, which cut it to a notch above junk status at Baa3 in June, and from Standard & Poor's, which cut it to BBB in May. Ericsson's bonds soared on hopes the rights issue may help it avoid having its credit rating cut to "junk" status.

The group's sales rose 4 per cent quarter-on-quarter to Skr38.5bn while the second-quarter pre-tax loss was Skr3.5bn, against forecasts of Skr4bn.

"There is no change in outlook ­ in fact it's even gloomier and the winter even harsher than we thought when the issue was announced," Mr Treschow said.

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