LDN - Business

Exclusive: Huawei to sell smartphone unit for $15 billion to Shenzhen government, Digital China, others - sources

[November 10, 2020] By Julie Zhu

HONG KONG (Reuters) - Huawei plans to sell budget-brand smartphone unit Honor in a 100 billion yuan ($15.2 billion) deal to a consortium led by handset distributor Digital China and the government of its home town of Shenzhen, people with knowledge of the matter told Reuters.

The plan comes as U.S. restrictions on supplying Huawei Technologies Co Ltd [HWT.UL] force the world's second-biggest smartphone maker - after South Korea's Samsung Electronics Co Ltd <005930.KS> - to focus on high-end handsets and corporate-oriented business, the people said.

It also indicates little expectation for any swift change in the U.S. perception of Huawei as a security risk following a new U.S. administration, one of the people said.

The all-cash sale will include almost all assets including brand, research & development capabilities and supply chain management, the people said. Huawei could announce it as early as Sunday, one of the people said.

Main Honor distributor Digital China Group Co Ltd <000034.SZ> will become a top-two shareholder of sold-off entity Honor Terminal Co Ltd with a near-15% stake, said two of the people. Honor Terminal was incorporated in April and is fully owned by Huawei, the corporate registry showed.

Digital China, which also partners Huawei in businesses such as cloud computing, plans to finance the bulk of the deal with bank loans, the two people said. It will be joined by at least three investment firms backed by the government of financial and technology hub Shenzhen, with each owning 10% to 15%, they said.

After the sale, Honor plans to retain most of its management team and 7,000-plus workforce and go public within three years, the people said, declining to be identified due to confidentiality constraints.

Honor declined to comment. Huawei, Digital China and the Shenzhen government did not immediately respond to requests for comment.

"It seems to be a drastic move given the Honor brand has been highly complementary to Huawei's smartphone portfolio," said Nicole Peng, vice-president of mobility at market research firm Canalys.

"The interesting synergy with potential buyers actually can be Honor's IoT (Internet of Things) business, which can see potential upside."

Honor is one of several brands aiming to turn their phones into control centers for internet-connected devices such as home appliances, to capture a potential market for future growth.

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Huawei's new Honor 20 smartphone is seen at a product launch event in London, Britain, May 21, 2019. REUTERS/Peter Nicholls

SANCTIONS

Shares of Digital China, which were trading nearly 1% higher on Tuesday morning, hit the maximum upper trading limit of 10% at 31.68 yuan ($4.80) in afternoon trade, after Reuters reported Huawei's plans to sell its unit.

"Digital China is a major distributor for Honor in China so we think this will help Honor maintain its market share in China," said Tom Kang, research director at market research firm Counterpoint.

"But its overseas operations may struggle as the U.S. policy on a spin-off is not clear and Huawei's huge marketing support may not be present."

The U.S. government last year moved to prevent most U.S. companies from conducting business with Huawei - also the world's biggest telecoms equipment vendor - citing national security concerns. Huawei has repeatedly denied being a security risk.

In May, Washington announced rules aimed at constricting Huawei's ability to procure chips featuring U.S. technology for use in fifth-generation (5G) telecommunications network equipment and smartphones such as its premium P and Mate series.

Huawei established Honor in 2013 but the business mostly operates independently. Divestment will mean Honor is no longer subject to Huawei's U.S. sanctions, analysts said.

Honor sells smartphones through its own websites and third-party retailers in China where it competes with Xiaomi, Oppo and Vivo in the market for lower-priced handsets. It also sells its phones in Southeast Asia and Europe.

Honor-brand smartphones made up 26% of the 51.7 million handsets Huawei shipped in July-September, estimates from researcher Canalys showed. Honor's products also include laptops, tablet computers, smart TVs and electronic accessories.

With margins thin for lower-end phones, Honor booked about 6 billion yuan in net profit on revenue of around 90 billion yuan last year, said one of the people, citing audited figures.

(Additional reporting by David Kirton; Editing by Christopher Cushing and Jacqueline Wong)

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