VIDEO: LeEco Moves on With Founder Jia’s Resignation

Bottom line: LeEco is likely to spin off its new energy car unit by the end of the year following the departure of founder Jia Yueting from the listed company, while it could also close its smartphone division.

LeEco set to spin off car unit?

In what looks like a major turning point for the foundering LeEco (Shenzhen: 300104), the company’s charismatic but embattled founder has relinquished his role as chairman at the publicly listed firm. This particular news came out just as people were leaving home for work last night, so it’s still not completely clear on what exactly has happened.

But it appears that one of the companies that had agreed to provide a major cash infusion, a real estate developer named Sunac (HKEx: 1918) was refusing to hand over the funds because it said certain unspecified conditions weren’t met from its agreement. Thus it appears that Jia’s departure from the listed company, and probably most of LeEco in general, was probably the big sticking point.

The most interesting question if Jia is really leaving LeEco is what will happen next. I suspect whoever steps in, who will almost certainly have strong backing from Sunac, will move quickly to dismantle many of Jia’s initiatives that got his company in trouble to begin with. That could spell big new uncertainty for LeEco’s smartphone business, as well as its sports and new energy car businesses. But more on that shortly.

Before we look at what’s ahead, let’s quickly zoom in on the headlines that saw Jia’s resignation announced in a company filing to the Shenzhen stock exchange. (Chinese article) The announcement said Jia will leave all of his roles at the listed company, including his board position and also the various committees that he sits on.

At nearly the same time as the first announcement came out, LeEco’s car division issued its own announcement to say that Jia will become its global chairman, helping it to raise cash and plan its broader strategy. This particular position will presumably include Jia’s role at Faraday Future, the struggling U.S. new energy automaker that was the major vehicle for LeEco’s new energy car foray.

No explanation was given for all the sudden moves, though I’ve tried to give a little background at the top of this post. Jia had previously resigned his position as LeEco general manager in May, which appeared to be a sticking point over Sunac’s agreement to provide the company a 15 billion yuan ($2.2 billion) lifeline. But now it appears that Jia, who remains one of the largest shareholders of the listed company, was still getting too much in the way for Sunac’s taste, hence his final departure from most of the company.

What’s Next?

So now that we’ve gotten all the headlines out of the way, let’s look quickly at what’s next for all of LeEco’s various pieces. First and foremost, I expect that whoever Sunac installs as new chairman and CEO will work quickly to formally hive off the company’s car unit and give that to Jia to deal with. That unit is such a financial black hole that I expect Sunac will give it to Jia for free, and let him figure out how to raise money to keep it going.

Then there are the company’s other big units that are also somewhat ancillary to its core TV operators, namely its sports, smartphone and filmed entertainment divisions. We’ll start with the easiest member of that group, namely the smartphones, which I expect will get dumped almost immediately, including LeEco’s large holdings in smartphone maker Coolpad (HKEx: 2369). That should instantly relieve LeEco of another money black hole, though it could move Coolpad another step towards the end of the road.

As to sports and filmed entertainment, these are two areas that are a little more related to LeEco’s core online video business, but are also huge money drains. Accordingly, I expect the company will either spin them off as a separate company forced to support itself, or more likely to sell the units to a deep-pocketed buyer like Wanda or Alibaba (NYSE: BABA). Of the pair, the sports division looks the least attractive and could get closed outright. The filmed entertainment unit looks slightly better, though only slightly.

At the end of the day, I expect Sunac will try to restore LeEco to its former glory when it was the operator of a highly popular paid video service. That might be easier said than done, since the landscape is now filled with a number of other major players. But it’s the best shot Sunac has, and will also hopefully see a retirement of the LeEco name, which was adopted to replace the original name of LeTV when Jia first embarked on his massive expansion spree more than two years ago.


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