Motorola Inc. is planning to funnel billions of dollars to its money-losing cellphone business when it splits off into a separate company next year.
Under a structure now taking shape, Motorola is planning to buy back most of its debt and give the bulk of its remaining cash — roughly $3 billion to $4 billion — to a new company centered on the cellphone unit, according to people familiar with the matter.
The Schaumburg-based company would also free the cellphone company of pension liabilities and most other obligations, highlighting how hard the Motorola board is pushing to ensure the viability of the business.
A Motorola spokeswoman declined to comment on the company’s specific plans. “The co-CEOs have a common vision and continue to work together and with respective teams to position each business to stand alone and succeed,” she said.
The telecom-equipment maker has been preparing to break up since early 2008, when it came under pressure from activist investor Carl Icahn, who argued the company would be worth more if separated into parts.
The cellphone unit has lost about $5 billion over the past three years, amid slumping sales, as its devices have been eclipsed by Apple Inc. and others.
Co-Chief Executive Sanjay Jha has slashed expenses and produced a slate of smartphones such as the Droid that are expected to help the division turn a profit by the end of the year. Verizon Wireless plans to unveil the next flagship Motorola phone, the Droid X, next week.
Under the current plan, Motorola would spin out the cellphone division and the profitable cable set-top box business into a new company called Motorola Mobility. Since the company would be free of debt and flush with cash, it would be better positioned to make acquisitions or develop new phones.
“The board doesn’t look at this as a defensive move,” one person familiar with the matter said. “It will be offensive.”
The remaining company, to be called Motorola Solutions, would be given little cash and take on pension obligations and most other liabilities, according to people familiar with the matter.
The unit, which makes public safety radios, handheld scanners and telecommunications network gear, currently generates nearly all of Motorola’s cash. Those divisions, led by co-Chief Executive Greg Brown, reported $11.1 billion in revenue last year. Their improved performance pulled the whole company back into the black in the first quarter.
This month, Motorola raised to $500 million the amount of debt it expects to buy back in a current tender. This is the first step of the plan to buy back the majority of its $3.9 billion in debt, according to people familiar with the matter. As of April 3, Motorola had $8.9 billion in cash and investments.
The idea is to leave two smaller companies with clean balance sheets that could make acquisitions or themselves be acquired, the people familiar said. Buying back debt before the split would boost the remaining companies’ credit ratings.
“It’s good for bondholders if they buy back debt,” said Ping Zhao, analyst at CreditSights. “Less debt means less leverage, so there’s less risk.”
Woes at the cellphone unit forced the company to delay earlier plans to split up.
Motorola, which once made one out of every five cellphones sold around the world, has seen its market share drop to about 3 percent since the collapse of the hit Razr.
As its scale eroded, the unit’s operating losses mounted, topping $500 million in some quarters and forcing 15,000 layoffs across Motorola since 2007.
Jha has stabilized the business by focusing on smartphones based on Google Inc.’s Android software. But the unit still lost $192 million in the last quarter.
