Huawei plans to sell budget-brand smartphone unit Honor in a 100 billion yuan ($15.2 billion) deal to a consortium led by handset distributor Digital China and the government of its home town of Shenzhen, people with knowledge of the matter told Reuters.
The plan comes as U.S. restrictions on supplying Huawei Technologies Co Ltd force the world's second-biggest smartphone maker - after South Korea's Samsung Electronics Co Ltd <005930.KS> - to focus on high-end handsets and corporate-oriented business, the people said.
It also indicates little expectation for any swift change in the U.S. perception of Huawei as a security risk following a new U.S. administration, one of the people said.
The all-cash sale will include almost all assets including brand, research & development capabilities and supply chain management, the people said. Huawei could announce it as early as Sunday, one of the people said.
Main Honor distributor Digital China Group Co Ltd <000034.SZ> will become a top-two shareholder of sold-off entity Honor Terminal Co Ltd with a near-15% stake, said two of the people. Honor Terminal was incorporated in April and is fully owned by Huawei, the corporate registry showed.
Digital China, which also partners Huawei in businesses such as cloud computing, plans to finance the bulk of the deal with bank loans, the two people said. It will be joined by at least three investment firms backed by the government of financial and technology hub Shenzhen, with each owning 10% to 15%, they said.
After the sale, Honor plans to retain most of its management team and 7,000-plus workforce and go public within three years, the people said, declining to be identified due to confidentiality constraints.
Honor declined to comment. Huawei, and the Shenzhen government did not respond to requests for comment.
Digital China - which did not respond to request for comment on Tuesday - in a stock exchange filing on Wednesday said it had not reached any agreement with Huawei about the Honor brand to date.
"It seems to be a drastic move given the Honor brand has been highly complementary to Huawei's smartphone portfolio," said Nicole Peng, mobility vice president at researcher Canalys.
"The interesting synergy with potential buyers actually can be Honor's IoT (Internet of Things) business."
Honor is one of several brands seeking growth by turning phones into controllers of internet-connected devices such as home appliances.
SANCTIONS
Shares of Digital China hit the maximum upper trading limit of 10% at 31.68 yuan ($4.80) on Tuesday after Reuters reported Huawei's Honor sale plan.
"Digital China is a major distributor for Honor in China so we think this will help Honor maintain its market share in China," said Tom Kang, research director at Counterpoint.
"But its overseas operations may struggle as the U.S. policy on a spin-off is not clear and Huawei's huge marketing support may not be present."
The U.S. government last year restricted U.S. companies from conducting business with Huawei - also the world's biggest telecoms equipment vendor - citing national security concerns. Huawei has repeatedly denied being a risk.
In May, Washington announced rules constricting Huawei's ability to procure chips featuring U.S. technology for use in fifth-generation (5G) telecommunications network equipment and smartphones such as its premium P and Mate series.
Huawei established Honor in 2013 but the business mostly operates independently. Divestment could mean Honor is no longer subject to Huawei's U.S. sanctions, analysts said.
Honor sells smartphones through its own websites and third-party retailers in China where it competes with Xiaomi Corp <1810.HK>, Oppo and Vivo in the lower-priced handset market. It also sells phones in Southeast Asia and Europe.
Honor-brand smartphones made up 26% of the 51.7 million handsets Huawei shipped in July-September, showed estimates from Canalys. Honor's products also include laptops, tablet computers and smart TVs.
With low-end phone margins thin, Honor booked 6 billion yuan in net profit on revenue of 90 billion yuan last year, said one of the people, citing audited figures.
($1 = 6.5775 Chinese yuan)
(Reporting by Julie Zhu; Additional reporting by David Kirton; Editing by Christopher Cushing and Jacqueline Wong)
