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HONG KONG: Huawei plans to sell the Honor budget smartphone unit in a 100 billion yuan (US $ 15.2 billion) deal to a consortium led by phone distributor Digital China and its city government Shenzhen native, people with knowledge of the matter said. Reuters.
The plan comes as US restrictions on the supply of Huawei Technologies Co Ltd force the world’s second-largest smartphone maker, after South Korea’s Samsung Electronics Co Ltd, to focus on high-end phones and business-oriented businesses. companies, the people said.
It also indicates little expectation of a rapid change in the US perception of Huawei as a security risk following a new US administration, one of the people said.
The cash sale will include nearly all assets, including the brand, research and development capabilities and supply chain management, the people said. Huawei could announce it on Sunday, one of the people said.
Honor’s main distributor, Digital China Group Co Ltd, will become one of the two major shareholders of the sold entity Honor Terminal Co Ltd with a stake of close to 15%, two of the people said. Honor Terminal was incorporated in April and is wholly owned by Huawei, corporate registration showed.
Digital China, which is also partnering with Huawei on businesses like cloud computing, plans to fund most of the deal with bank loans, the two people said. It will be joined by at least three government-backed investment firms from Shenzhen’s financial and technology hub, each of which owns between 10 and 15 percent, they said.
After the sale, Honor plans to retain most of its management team and more than 7,000 employees and go public within three years, said the people, who did not want to be identified due to confidentiality restrictions.
Honor declined to comment. Huawei, Digital China and the Shenzhen government did not immediately respond to requests for comment.
“It appears to be a drastic move given that the Honor brand has been very complementary to Huawei’s smartphone portfolio,” said Nicole Peng, vice president of mobility at market research firm Canalys.
“The interesting synergy with potential buyers may actually be Honor’s IoT (Internet of Things) business, which may see upside potential.”
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.
SANCTIONS
Shares of Digital China, which were trading nearly 1% higher Tuesday morning, hit the upper 10% trading limit at 31.68 yuan (US $ 4.80) in afternoon trading, after Reuters reported on Huawei’s plans to sell its unit.
“Digital China is a major distributor for Honor in China, so we believe 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 run into difficulties as the US policy on a spin-off is unclear and Huawei’s huge marketing support may not be there.”
Last year, the US government acted to prevent most US companies from doing business with Huawei, also the world’s largest telecommunications equipment provider, citing national security concerns. Huawei has repeatedly denied being a security risk.
In May, Washington announced rules aimed at restricting Huawei’s ability to purchase American-tech chips for use in fifth-generation (5G) telecommunications network equipment and smartphones like its premium P and Mate series.
Huawei established Honor in 2013, but the business mainly operates independently. The divestment will mean Honor is no longer subject to U.S. sanctions from Huawei, 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 phones. It also sells its phones in Southeast Asia and Europe.
Honor-brand smartphones made up 26 percent of the 51.7 million phones Huawei shipped between July and September, estimates from researcher Canalys showed. Honor’s products also include laptops, tablets, smart TVs, and electronic accessories.
With low margins for low-end phones, Honor set aside about 6 billion yuan in net profit on revenue of about 90 billion yuan last year, one of the people said, citing audited figures.
(Additional reporting by David Kirton; edited by Christopher Cushing and Jacqueline Wong)
