CELLPHONES: LeTV Challenges Qihoo With Coolpad Stake Buy
Bottom line: LeTV’s purchase of a major stake in Coolpad is likely to upset Coolpad’s existing alliance with Qihoo, and could lead to a turbulent period that could ultimately see one of the alliances terminated.
The battle for supremacy in China’s crowded smartphone space has just taken a strange twist, with word that online video superstar LeTV (Shenzhen: 300104) has purchased a major stake in domestic manufacturer Coolpad (HKEx: 2369). This particular move was quite unexpected, as I had written just last week that software security specialist Qihoo 360 (NYSE: QIHU) was the most likely candidate to purchase a stake in Coolpad being sold by the company’s largest shareholder, Data Dreamland.
Coolpad was once one of China’s hottest homegrown smartphone makers, but intense competition drove it to form a joint venture late last year with Qihoo, which contributed $420 million in much-needed cash for its stake in the venture. That led me to believe that Qihoo could make a bid to invest directly in Coolpad and perhaps eventually buy the company outright after Data Dreamland last week announced its intent to sell some or all of its 38.3 percent stake in Coolpad. (previous post)
The bigger story is that many of China’s largest Internet companies are now racing to get into the smartphone space, believing such a move will help to promote their mobile products and services that are most often accessed over such devices. Qihoo’s Coolpad joint venture was clearly aimed in that direction, and LeTV launched its own line of smartphones in April. (previous post) Most of China’s other major Internet companies have also invested in the space.
Against that backdrop, this latest investment by Leview Mobile, a division of LeTV, certainly looks logical but somewhat surprising due to Coolpad’s existing Qihoo connection. According to the latest reports, Leview has paid the equivalent of 2.18 billion yuan ($280 million) for 18 percent of Data Dreamland’s previous stake. (Chinese article) The sale will reduce Data Dreamland’s stake in Coolpad to about 20 percent, allowing it to maintain its position as the company’s largest single shareholder.
This particular deal comes just weeks after LeTV raised around $400 million for its Leshi Mobile unit, which was created to spearhead its move into mobile devices. (previous post) That funding was led by Internet giant Tencent (HKEx: 700), and was so popular that the final target was reportedly raised by 50 percent, giving the unit a value of $4.5 billion.
LeTV has been quite clear that it aims to become a major player in the smartphone space, even though it’s quite late in coming to the market. That’s because the company, along with most of its peers including Xiaomi, are all aiming to create their own ecosystems that include a wide range of Internet services and also the products like smartphones and smart TVs that deliver those services.
Please Be My Partner
This particular investment appears to show that LeTV has chosen Coolpad to be its future smartphone partner, which looks like a relatively smart choice. Coolpad was one of the earlier Chinese companies into the smartphone space, and its products are still relatively well respected despite the company’s more recent loss of market share to better-funded homegrown giants like Huawei, Xiaomi and Lenovo (HKEx: 992).
But all of that said, it does seem a bit unusual for a single company to have 2 such major manufacturing partners, which is what has now happened to Coolpad. Even the size of Qihoo’s and LeTV’s investments are roughly comparable, though the vehicle for those investments is slightly different.
It wouldn’t be impossible for Coolpad to produce smartphones for both LeTV and Qihoo, but I could see problems quickly emerging due to the big egos and different strategies by both companies’ chief executives. Accordingly, we could see some turbulent times ahead for Coolpad in the next year, which could ultimately result in the end of the partnership with either LeTV or Qihoo.
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