SMARTPHONES: Qihoo Takes Over Coolpad JV, LeTV in Limbo

Bottom line: Qihoo’s settlement of its dispute with Coolpad could ultimately see the former buy out their joint venture, leaving the latter open to a takeover by LeTV.

Qihoo, Coolpad settle JV dispute

Security software specialist Qihoo 360 (NYSE: QIHU) and smartphone maker Coolpad (HKEx: 2369) have announced a settlement in the spat over their troubled joint venture, though this hardly looks like the end of an entertaining story that has captivated China’s high-tech world for the last few months. This kind of settlement seemed likely, after Qihoo tried to forcibly sell its stake in the joint venture to Coolpad over claims that the latter had violated an anti-compete clause in their agreement.

Qihoo and Coolpad formed their joint venture last year, and Qihoo made its complaint after Coolpad later formed another smartphone manufacturing partnership with online video company LeTV (Shenzhen: 300104) in June. Now Qihoo says it has settled its dispute by agreeing to boost its stake in the Coolpad joint venture to 75 percent, giving it clear control of the enterprise.

Two big questions will remain going forward, following this latest development in a story that has all the elements of a trashy romance novel centered on a corporate love triangle. The first is how this new agreement will affect Coolpad’s separate deal to manufacture smartphones for LeTV. The second is what will happen to Coolpad, as it gets caught in a tug-of-war between these 2 aggressive suitors. My guess is that Qihoo will ultimately take over the joint venture, leaving LeTV to buy whatever is left of Coolpad.

Investors were quite happy at the development that has ended several weeks of acrimony and was posing a huge potential liability for Coolpad. That’s because Qihoo was threatening to exercise an option in their joint venture agreement that would have forced Coolpad to buy out the venture for more than $1 billion.

With that worry now gone investors piled back into Coolpad’s stock at the end of last week, with the Hong Kong-listed shares jumping 13 percent in Friday trade. The rally was partly due to relief, but could also signal that investors believe Coolpad’s days as an independent company are numbered. It could soon become a takeover target for Qihoo, LeTV, or perhaps even another buyer looking to enter the smartphone space.

Taking Control

According to Qihoo’s latest announcement, it will boost its stake in the joint venture to 75 percent from a previous 49.5 percent, with Coolpad’s share falling to 25 percent from a previous 50.5 percent. (company announcement; Chinese article) Qihoo said it will transfer some of the joint venture’s assets that continued to make Coolpad-brand smartphones back to Coolpad, indicating that no cash changed hands as part of the settlement.

Qihoo added that following the development, it will no longer pursue its previously announced plan to exercise a “put option” that would have forced Coolpad to buy out the joint venture. (previous post) The pair set up the joint venture last December, but the partnership quickly soured as Qihoo reportedly tried to dominate the partnership despite holding a minority stake.

Now that we’ve covered the latest developments, let’s close with a look at what’s likely next in this story that may still have a few chapters left. Qihoo estimated the joint venture might be worth up to $1.5 billion at the time of its earlier threat to make Coolpad buy out the business. I expect $1 billion may be a more accurate assessment, especially after the venture returned some assets to Coolpad as part of the settlement.

Coolpad currently has a market value of about $700 million, meaning about a third of its value is now locked up in the joint venture. Following this settlement, I wouldn’t be surprised to see Coolpad sell its remaining 25 percent stake in the venture completely to Qihoo in the next year. If and when that happens, Coolpad itself could become a relatively easy target for LeTV to take over completely and fold into its own hardware unit.

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