Bottom line: LeEco’s debt-for-equity deal with Compal and the looming collapse of its Vizio purchase are welcome developments that show it could quietly jettison some of its newer businesses and eventually emerge from its current cash crunch.
The unwinding of former online video superstar LeEco (Shenzhen: 300104) continues to unfold, with two major developments that could help to slow the company’s rapid decline. The first of those has one of LeEco’s largest creditors, Taiwan contract manufacturer Compal (Taipei: 2324), agreeing to swap out the huge amount of money it’s owed for LeEco shares. The second has a major deal last year that had LeEco agreeing to pay $2 billion for US television brand Vizio apparently unraveling due to China’s recent clampdown on money leaving the country for offshore M&A.
Both developments are bad news for the other companies involved, in this case a Compal that will end up with lots of LeEco shares of dubious value, and a Vizio that probably was heavily counting on LeEco cash to continue funding its operations. But from LeEco’s perspective, the two moves combined will save it about $2.1 billion in cash, a huge amount for a company whose problems stem from its overzealous expansion over the last 2 years.
The bigger question will be whether these efforts are enough to save the company, or whether it’s too little too late. I suspect the answer is that LeEco will probably manage to emerge from this mess in one form or another, but that we’ll see a lot more developments like these two and probably a few asset sales by the time the dust settles.
When it does emerge, the new LeEco could well resemble the online video company it was before it began its crazy expansion about two years ago. It’s also quite likely its stock will be worth a fraction of its current value, and that charismatic but overambitious chief Jia Yueting will be booted out from his position as CEO.
All that said, let’s begin with the news about Compal, one of the main suppliers for LeEco’s relatively new line of smartphones, which was reportedly owed around $130 million. The latest reports are saying that Compal has agreed to swap out most or all of that debt for around 700 million yuan ($100 million) worth of LeEco stock. (Chinese article)
Not surprisingly, LeEco is issuing new shares to make the move, repeating something it did quite often to fund its expansion back in the days when its stock was a hot property. The transaction will give Compal about 2.1 percent of LeEco’s stock, which is worth nearly $200 million, based on LeEco’s latest share price.
That looks like a good deal for Compal, though there are probably restrictions on its ability to sell the stock right away to avoid volatility. Whenever those restrictions end, which is likely in 6 months to a year, look for Compal to dump the shares. At that point they’ll probably be worth significantly less than they are now, meaning Compal could very easily lose money if the stock drops by half or more by then. LeEco will also emerge as a big loser from this transaction, as I imagine that Compal will refuse to take anymore orders for LeEco smartphones after this.
Then there’s the unraveling of the Vizio deal, which is coming in reports from unnamed sources saying the purchase could “quite possibly” collapse. The reason being cited is foreign currency controls, as China tries to slow down a slightly irrational wave of overseas M&A that crested last year. That’s certainly a valid reason, as a number of other high-profile and expensive deals have reportedly neared collapse this year for similar reasons.
Still, I can’t help but thinking in this case that LeEco is probably somewhat relieved that it might get a chance to walk away from this particular deal. Vizio never looked like a very attractive asset to me, as it’s in a very low-margin business due to its status as a no-name TV maker that competes with other brands based purely on price. LeEco wanted the asset mostly for its US presence, but I suspect that part of its expansion has been put on hold while it sorts out its bigger financial situation.
Accordingly, LeEco will probably let this deal die quietly on the vine, and use the foreign currency controls as a convenient excuse. That could come as a huge relief for the company, which really needs to shore up its position in China right now and jettison some of its other businesses if it can do so cheaply and without suffering major damage. That seems to be what it is doing with Vizio and also the Compal debt-for-equity swap, which perhaps bodes well that the company will ultimately survive its current financial mess.