Huawei intends to sell its budget electronics subsidiary Honor to a Chinese-based consortium for ¥100 billion ($15.2 billion), Reuters reported. If the transaction goes forward, the conglomerate will transfer majority ownership of the brand to Digital China Group and the city of Shenzhen.
The telecom reportedly began negotiating the sale of its secondary smartphone business last month.
The Terms of $15.3 billion Honor Sale
Reuters states Huawei will divest its Honor unit, include its design, manufacturing, and logistics departments, as part of an all-cash deal. The news agency said the conglomerate could announce the transaction as early as this weekend.
Digital China, an electronics distributor, will become a 15 percent Honor stakeholder under the agreement’s terms. A trio of investment firms backed by Shenzhen will acquire 10 to 15 percent ownership shares.
Honor’s new owners plan on keeping the brand in one piece once the transaction goes through. The consortium will reportedly keep the majority of its 7,000-person management team and workforce on the payroll. The group also intends to take the smartphone company public within three years.
When news of the sale first broke last month, Huawei supposedly intended to sell Honor for ¥15 billion to ¥25 billion ($2.2 billion to $3.7 billion). Last year, the subsidiary generated ¥90 billion ($13.5 billion) in revenue and ¥6 billion ($904.7 million) in net income for its parent corporation.
As of this writing, Huawei, Honor, and Shenzhen’s government have not commented on a deal being made.
How the Honor Sale Benefits its Seller and Buyers
To start, Huawei would derive multiple financial benefits from transferring control of Honor.
In May, the U.S. Commerce Department announced it would enact new export controls in mid-September, limiting the telecom’s access to certain American semiconductor technology. In response, the conglomerate began stockpiling electronic components to keep its smartphone business afloat. But with its chip inventory dwindling, it needed to make some hard choices.
By selling Honor, Huawei could exclusively use its cached parts on its premium, and therefore more lucrative, hardware. The telecom can also utilize its proposed $15.3 billion cash injection to sustain itself while transitioning out of the handset business.
For Digital China, acquiring a majority stake in Honor would diversify its revenue streams. In the past, the corporation teamed with Huawei to distribute its subsidiary’s products. That prior relationship and its industry experience should make the asset transfer fairly seamless. In addition, market analysts told Reuters the brand would no longer be affected by U.S. sanctions if its links to Huawei are severed.
The three Shenzhen backed investment firms would also benefit handsomely from owning a piece of Honor. As a low-budget vendor, its margins are not massive, but it is a profit-generating enterprise.
That said, Honor’s new owners would likely see a meaningful return on their investment if the brand goes public. Without Huawei’s procurement complications, the company could introduce premium handset offerings relatively quickly. Given its popularity within the Chinese electronics sector, it might be able to gobble up its old owner’s market share and 12-figure revenue.
Digital China and Shenzhen might look back on their $15.2 billion capital expenditure as a bargain in that scenario.