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Onex holds on tight as Celestica woes go from bad to worse

Shares tank 23% after Mexican move, plunging confidence

From Thursday's Globe and Mail

Just two months into the job, Celestica Inc.'s latest chief executive officer is already facing the question that plagued his predecessors: Is it time to try to sell the struggling company?

"I'm not in the camp that says I'm ready to throw the baby out with the bathwater here," said Craig Muhlhauser, who took over as head of the electronics maker in November with a mandate from controlling shareholder Onex Corp. to get Celestica back into growth mode after six years of restructuring.

"I am not going to accept that we [must] sell this company to create the value for our shareholders that they rightly deserve," added Mr. Muhlhauser, replying to an analyst's query yesterday after the company predicted another quarterly drop in revenue and announced unexpected restructuring charges that caused a 23-per-cent plunge in Celestica shares to a record low.

Celestica's latest problems stem from hiccups caused by the company's rush to move production to Mexico in an attempt to reduce costs, and the manufacturer now faces "a loss of customer confidence," Mr. Muhlhauser said. The company is losing contracts from large customers that include Nortel Networks Corp. and Alcatel-Lucent.

"They just jammed too much stuff down their throats [in Mexico] and they couldn't handle it," said Andrew Huang, an analyst with American Technology Research in San Francisco.

And Mexico isn't the only problem. The Toronto-based company's European operations are also unprofitable.

The latest round of restructuring will cost as much as $80-million (U.S.), on top of the approximately $340-million of charges booked in 2005 and 2006. In total, the costs of Celestica's various attempts to rejig its business since the technology bubble burst in 2001 add up to more than $2-billion.

Given the company's struggles, even if Onex and Mr. Muhlhauser were to put the company up for sale, there would be few interested buyers, analysts said. The whole electronics manufacturing industry is struggling with too much capacity and soft demand.

"Who would want to inherit a problem like this?" Mr. Huang said. "Maybe if the price was right. But there are a lot of players in the industry and Celestica isn't the only one having problems."

Customers aren't the only ones losing confidence. Celestica shares, which reached a high of more than $60 in 2001, fell $1.77 yesterday to close at $5.96 on the New York Stock Exchange.

Just before facing the markets with the latest round of bad news, Mr. Muhlhauser, his team and the board spent three days holed up at the Monterrey, Mexico, facilities working on a comeback strategy.

The top priority is to restore customer confidence, followed by fixing the Mexican operation, making European operations profitable, improving inventory management, and eliminating waste, Mr. Muhlhauser said. "We know what needs to be done."

Amid Celestica's struggles, Onex has shown no interest in cutting ties. The buyout firm, which controls Celestica through multiple-voting shares, turned a $199-million investment in Celestica in 1996 into about $1-billion of gains. Onex still holds about 12 per cent of Celestica's shares, but that stake makes up only a small fraction of Onex's current assets.

Because of that, reviving Celestica may be more about reputation than money for Onex -- a fact reflected in Onex's share price yesterday, which barely budged. With Onex founder Gerald Schwartz sitting on the Celestica board, the execution problems at Celestica affect Onex's image as a manager.

Celestica has been a model for one of Onex's key business strategies: Buying a small, underappreciated unit from a big company -- in this case International Business Machines Corp. -- and building it into a standalone company. That may give Onex incentive to stick it out and keep working for a turnaround.

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