ERG buys Motorola's share of joint venture

Listed WA smart card specialist ERG has agreed to fork out $A46 million in cash in order to buy the share of its ERG Motorola Alliance that was previously owned by Motorola Worldwide Smartcard Solutions Division. When the deal is completed ERG will assume responsibility for all of the alliance's existing and prospective projects, and will pocket all revenue they may generate. However, the two companies will be expected to co-operate in the support of all existing customers.

Peter Fogarty, CEO of ERG, explained that the ERG and the alliance had both evolved to the extent that the buy-out could be undertaken. "In 1997 ERG needed to strengthen its balance sheet and expand its capacity to support a number of new projects," Fogarty said. "The capital Motorola provided to ERG at that time, coupled with Motorola's involvement in the alliance projects has made a significant contribution to ERG's growth over the past three years. ERG has developed a strong financial position and capability to support its global smart card aspirations on its own.

"The alliance was focused on fare collection and ERG is now intent on expanding its horizons in the smart card industry and the structure of the alliance threatened to hold back its prospects," Fogarty claimed. "ERG needs to be free to join with different partners and buy product from different suppliers. The concept of sharing revenue and profit threatened to restrict the group achieving its own profit targets."

The market was not convinced the move is good for ERG and reacted unfavourably to Motorola's accompanying announcement that it will sell all of its 82.6 million shares in ERG.

The announcement of ERG's decision to buy Motorola out of the alliance coincided with the announcement of the WA company's half-yearly report, in which it lifted revenue four per cent to $A184 million and boosted EBITDA by 39 per cent from $A22.4 million to $A31.25 million. ERG's R&D spend rose to $A44.1 million, representing 24 per cent of revenue during the quarter, but "was distorted by the impact of the sale of the telecommunications' manufacturing business during 2000 calendar year and an aggressive development plan associated with major projects". Earnings per share increased seven per cent to 2.5 cents.

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