Huaxin Chases Alcatel Office Phone Unit
Telecoms history looks set to repeat itself, with word that a Chinese investor is in talks to buy the office telecoms business of struggling French networking equipment maker Alcatel-Lucent (Paris: ALU). On the one hand, I have to congratulate Alcatel for getting any money at all for the unit, which I suspect is either losing money or perhaps is marginally profitable. On the other hand, I honestly don’t understand why Chinese investment firm Huaxin Post & Telecommunication could possibly want this business, following a disastrous track record for similar European acquisitions by Chinese firms.
According to the latest reports, Alcatel is in talks to sell 85 percent of the office phone unit to Huaxin, in a deal that would see the latter pay 200 million euros ($272 million) and assume the unit’s debt. (English article; Chinese article) The deal is part of a broader drive by Alcatel-Lucent to sell off ancillary units to focus on its core networking equipment business, as it looks for long-term profitability following years of losses and restructurings. Alcatel would retain 15 percent of the office phone unit under the deal being discussed.
Huaxin and Alcatel already have a relationship through their partnership in Alcatel-Lucent Shanghai Bell, one of the oldest Sino-foreign telecoms joint ventures in China. Alcatel disclosed the talks as it reported it swung to a profit in the fourth quarter from a loss a year earlier.
Alcatel is no stranger to selling its underperforming assets to Chinese buyers, following the sale of its cellphone business to TV giant TCL (HKEx: 2618; Shenzhen: 000100) nearly a decade ago. Historians will recall that sale posed a huge challenge for TCL, which had no experience dealing with France’s tough labor laws and high costs. TCL Multimedia (HKEx: 1070), the Chinese company’s TV division, experienced similar difficulties around the same time after purchasing the TV assets of French electronics giant Thomson.
TCL isn’t the only company that has run into trouble trying to rescue a sinking European telecoms asset. Former Taiwanese high-flyer BenQ encountered huge headaches with its purchase of the cellphone assets of Siemens (Frankfurt: SIEGn) also about a decade ago, and the company never really recovered after that. A couple of other European purchases by Chinese automaker Geely (HKEx: 175) have also proved challenging for the company.
So, with all that history going against it, many observers are probably asking themselves why Huaxin might be chasing this latest deal, and why it’s even willing to pay money for the privilege. My guess is that Huaxin probably won’t end up paying any actual cash, and will most likley finance the purchase via some other means such as an asset-swap. Relationships could also be a factor here, as Huaxin may be doing this deal partly as a favor to help its longtime French partner.
Then there’s also the possibility that Huaxin may actually want this asset to gain a toehold in Europe. It’s not completely clear from the reports what this office phone unit does, but clearly it’s not a maker of mainstream consumer products. My guess is that it probably makes customized phones used in corporate offices, which often include many specialized functions like multiple lines and call transferring capabilities.
Such a business might be slightly attractive, since its main European-based assets are probably just product development facilities, and it almost certainly does most of its manufacturing in Asia. Keeping Alcatel as a minority partner could also help Huaxin to navigate France’s tough labor laws. Still, this deal looks far too similar to the ones in the past that have failed, and I wouldn’t be at all surprised to see Huaxin ultimately write off this purchase in the next couple of years after failing to turn it around.
Bottom line: Huaxin’s purchase of Alcatel’s office phone business is likely to end in failure, repeating similar experiences by Chinese companies purchasing troubled telecoms assets in Europe.
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