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Flextronics Makes Wireless Play in Microcell

Singapore-based Flextronics International Ltd. , a leading contract manufacturer for a variety of technology products, is buying Microcell Group, a maker of wireless communications equipment.

Flextronics will pay $80 million in cash, and will assume $120 million of Microcell's debt. The purchase is not expected to significantly impact Flextronics sales, but could have a slightly positive effect on earnings in 2004. The deal is expected to close in October.

Microcell has product development centers in Finland and Denmark, with major manufacturing operations in Nanjing, China and administrative offices in the United States and Switzerland.

The move puts Flextronics in the forefront of the original design and manufacturing of mobile phone systems. In a press release, Flextronics said that Microcell is "a leading original design manufacturer ("ODM") of wireless Global System for Mobile Communications ("GSM"), General Packet Radio Service ("GPRS"), and Enhanced Data Rates for Global Systems for Mobile Communications Evolution ("EDGE") handset products."

"Microcell is especially strong in the product creation area with over 300 product creation engineers that have a proven track record of providing mobile phone solutions to leading OEMs," Flextronics said.

Flextronics is expected to discuss details of the deal on its regularly scheduled mid-quarter conference call, which is scheduled for August 18.

Analysts are mixed in their outlook on Flextronics, with three starting coverage back in July.

On July 10, Banc of America started Flextronics with a "Buy" rating, then on July 15, UBS started its coverage of the high-tech manufacturer with a "Neutral" rating. And on July 18, Wells Fargo started coverage of the company with a "Hold" rating.

On July 31, Flextronics sold $500 million of seven-year convertible senior subordinated notes in a private placement market. CSFB was one of several major banks managing the sale, sources told Reuters.

Minutes after the placement was announced, Standard & Poor's Ratings Services said it assigned its "BB-" rating to Flextronics notes that come due in 2010. S&P also affirmed Flextronics' "BB+" corporate credit rating and gave the company its "stable" outlook.

S&P went onto say Flextronics had total debt outstanding of $1.7 billion as of June 2003. The report added that sales growth at Flextronics "has slowed, as revenue remained flat in the 12 months ended June 2003, with total sales of about $13 billion."

"We expect end-market demand in communications and computing to remain weak over the near term. We believe it will be an ongoing challenge for Flextronics to maintain its operating performance while executing management's growth strategy in the midst of a severe downturn in end-market demand. On the other hand, the long-term nature of the company's customer relationships and its moderate financial profile provide ratings protection," said Standard & Poor's credit analyst Emile Courtney, in her company's report on Flextronics issued on July 31.

Then on August 6, Credit Suisse First Boston said it raised its price target for Flextronics shares to $15, up from $12. CFSB cited new financing for the company for its analyst recommendation.