SMARTPHONES: Coolpad in Denial on LeEco Takeover Talk

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Bottom line: Rumors that LeEco is in talks to take over Coolpad are probably true, with a deal likely in the next few months that would see the former buy a controlling stake or even purchase the latter outright.

Coolpad to be acquired by LeEco?

I don’t usually write about rumors, but I just couldn’t resist opining on new market talk saying that struggling smartphone maker Coolpad (HKEx: 2369) may become the first major player to get swallowed up in a looming industry shakeup. In this case Coolpad is denying the rumors, which say it will be acquired by online video superstar LeEco (Shenzhen: 300104), which is already a major stakeholder and now pays Coolpad to manufacture its recently launched line of smartphones.

There are quite a few threads to this story, but the big picture is that China’s smartphone market has been crowded with more than a dozen major players and dozens more smaller ones for the last 2 years. The result has been intense competition that has left everyone fighting for market share and often losing money, leading to a string of bankruptcies among smartphone manufacturers and component makers.

Coolpad was a once a leader in the space due to its early arrival, but lately has also become a victim of the stiff competition and also a bruising business dispute last year with former joint venture partner Qihoo 360 (NYSE: QIHU). Following that battle, Coolpad emerged with LeEco, formerly known as LeTV, as its main strategic financial backer with 18 percent of the company. (previous post)

That stake is now worth about $160 million, or about half of what it was when LeEco purchased the stock last year. Coolpad shares actually rallied nearly 7 percent in the last trading session in Hong Kong, most likely due to the takeover rumors. But even at their current level, LeEco could buy out some or all of the remaining shares of Coolpad for a relatively affordable $750 million or less, based on its latest market value.

All that said, let’s take a look at the latest rumors and try to figure out whether or not there’s any truth behind the talk. The rumors originated from a WeChat public account called “Media Field Camp”, that said takeover talks were in progress and that LeEco would announce a deal next month. (Chinese article) A Coolpad spokesman denied the rumors, and a LeEco spokesman declined to comment.

But the more reputable Sina (Nasdaq: SINA) reported that a Coolpad insider told it that a sale of the company to LeEco was inevitable sooner or later. From years of experience as a reporter working with Chinese companies, I can safely speculate that the spokesman’s denial was probably the equivalent of a “no comment”; and also that the unnamed insider was probably the same spokesman giving unofficial comments to a Sina reporter.

Not the First Time

The reports point out that this isn’t the first time that rumors have surfaced about an acquisition of Coolpad by LeEco. That is indeed true, though I might argue that the earlier rumors may have also had some basis in fact even though no deal was ever reached. Such is often the case for mergers and other equity tie-ups in China, where fickle controlling shareholders often resist being acquired until they face potential bankruptcy.

If the latest rumors are true, Coolpad would become the largest victim to date of China’s smartphone wars, though it wouldn’t be the first. That dubious honor goes to Dakele, which abruptly closed up shop in March. (previous post) Another company that has given off steady signals of building difficulties is mid-sized player OnePlus.

In this case Coolpad’s future is a bit more secure than the others because of its ties with LeEco, which has plenty of cash and also big ambitions for the smartphone market. That means that even if Coolpad is in financial difficulties, LeEco is unlikely to let it fail due to its shareholding and also dependence on Coolpad as its manufacturing partner. Accordingly, I do expect we’ll see LeEco boost its Coolpad ownership to a controlling stake soon, and possibly even buy the company outright.

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