SMARTPHONES: LeEco Sells Down Coolpad Stake

Bottom line: LeEco’s sell-down of its Coolpad stake is a prelude to disposal of the remainder, and could presage a sale of Coolpad to another smartphone maker later this year.

LeEco sells down Coolpad stake

The unraveling of former online video superstar LeEco (Shenzhen: 300104) continues as we head into the new week, with word the company has sold off a significant chunk of its stake in struggling smartphone maker Coolpad (HKEx: 2369) for a fraction of what it paid. This particular news is significant for a number of reasons, only one of which involves the latest attempt to salvage LeEco. It also has large implications for the future survival of Coolpad, and China’s broader smartphone industry. Some have predicted 2018 will be the year this overcrowded industry finally sees a weed-out that is long overdue.

I and many others have predicted this particular sale for a while, so the actual news doesn’t come as a huge surprise. LeEco purchased about 30 percent of Coolpad in two tranches for a combined $500 million in 2015 and 2016, when it was at the height of its meteoric rise. Coolpad had a relatively sound name at that time, though it was already feeling the effects of intense competition in China’s smartphone space. Fast forward to the present, when the future of both companies is in serious doubt, as each loses big money and struggles under major debt piles.

According to the latest headlines, LeEco sold off shares worth about 18 percent of Coolpad’s total. (English article) That brought LeEco’s total holdings in Coolpad down to about 11 percent of the company. Of course everyone will be asking how much LeEco actually got for those shares, and the answer is about $100 million. Some quick math shows that stake probably cost LeEco originally around $330 million, meaning it is taking a $230 million bath on the sale.

Again, none of that is too surprising, since LeEco was buying things left and right and making new investments, all at inflated prices, back in its heyday. And we should also be fair and point out that Coolpad at that time wasn’t the basket case that it is now. Coolpad hasn’t released any official financials for a year now. The last word we got from them was that the company estimated its loss for the first quarter of 2017 at HK$460 million ($59 million), and was expecting to post a loss of HK$600 million to HK$800 million in the first half of last year.

Coolpad has popped into the headlines on and off over the last year, mostly giving signals about the turmoil in the company and its financial woes. Its stock has been suspended for a long time, and it’s quite possible the shares may never resume trading if the company can find a buyer. But its assets are probably losing more and more money over time, so it’s not clear any buyer will be interested in the company.

Lofty Valuation?

The $100 million LeEco is getting for the 18 percent of Coolpad it’s selling is the closest thing we have to a valuation these days, and would put the company’s value at about $555 million. That’s actually a bit above Coolpad’s latest market valuation of $464 million, which is where the stock was when trading was suspended last spring. That’s a bit surprising since presumably the company’s situation has deteriorated since the suspension.

Besides this new investment, Coolpad did get another lifeline back in October when another investor purchased $75 million worth of the company’s bonds. Those signals seem to imply that at least someone sees value in the company, even if that someone isn’t LeEco. Of course the story with LeEco is that it booted its founder, Jia Yueting, last year and the new chairman is trying to salvage the company.

That salvage effort obviously needs to include jettisoning non-core and money-losing assets, both of which are appropriate to describe Coolpad. As to the future, this particular sale looks like a prelude to LeEco’s complete disposal of all of its Coolpad stake sometime later this year. For Coolpad’s longer-term prospects, I wouldn’t be surprised if a smartphone maker or someone with smartphone aspirations steps in and makes a lowball offer for the company later this year as well.

 

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