LeEco in retreat after abandoning US$2b takeover of American TV maker Vizio

Company blames ‘regulatory headwinds’, but analysts fear firm still strapped for cash despite 15b yuan Sunac investment

PUBLISHED : Tuesday, 11 April, 2017, 5:43pm
UPDATED : Tuesday, 11 April, 2017, 11:00pm

Cash-strapped Chinese internet conglomerate LeEco may look to fortify its businesses in China, as the company beats a retreat from an ambitious US expansion by scrapping its US$2 billion acquisition of American television maker Vizio.

In a joint announcement made overnight in the US, LeEco and California-based Vizio said their merger “will not proceed due to regulatory headwinds”, which appears to reflect the current state-of-affairs under Beijing’s tightened control on capital outflows.

The two companies said they have reached a new agreement to “engage in a collaborative partnership” that will “bring Vizio products to the China market”.

“This not the first time that a Chinese company has had to abandon an acquisition, either because of capital controls or foreign government policy,” Kitty Fok, the managing director at IDC China, told the South China Morning Post on Tuesday.

“With the financial challenges faced by LeEco since last year, refocusing in China to build products and strengthen its business strategy is the right thing to do for the company.”

Mainland China’s outbound mergers and acquisitions activity had tumbled 64 per cent in the first quarter to US$31 billion, down from a high of US$86 billion a year ago due to the government’s tough capital controls, according to global consultancy McKinsey.

Another of the country’s large domestic companies impacted by the controls is Soho China, the biggest commercial developer based in Beijing.

Soho chairman Pan Shiyi said last month that it had to cancel a major sale of a Shanghai property, the proceeds of which were earmarked to fund a foreign investment, because the central government’s strict controls made it unfeasible to pursue the overseas project.

“I’m not sure I buy LeEco’s story. LeEco has a history of securing considerable funding without any difficulty in China even as a number of its companies seem to have problems paying staff and suppliers.” said Paul Haswell, a partner at international law firm Pinsent Masons.

“Its acquisition of Vizio was unlikely to have been investigated or blocked by a regulator ... even in the current US political climate. So I have to conclude LeEco is facing challenges that have forced the company to curtail its US ambitions.”

In January, LeEco founder and chairman Jia Yueting declared that the cash problems of its listed and unlisted businesses had been solved “once and for all” after Hong Kong-listed property developer Sunac China Holdings made a 15 billion yuan investment in the company.

I’m not sure I buy LeEco’s story. LeEco has a history of securing considerable funding without any difficulty in China even as a number of its companies seem to have problems paying staff and suppliers
Paul Haswell, partner at international law firm Pinsent Masons

In March, however, reports surfaced that LeEco planned to sell its 49-acre plot of land in California’s Silicon Valley, which it bought from Yahoo less than a year ago, to Chinese real estate developer Genzon Group for US$260 million.

Genzon confirmed it was in talks to buy the site, but a LeEco spokesperson would only say it was working to secure a “development partner”.

LeEco’s Shenzhen-listed subsidiary, Leshi Internet Information & Technology Corp Beijing, said on Monday that its growth slowed in January and February due to a cash crunch at its affiliated companies. It estimated first-quarter net profit to range between 103 million yuan, which would represent a 10 per cent year-on-year decline, and 132 million yuan, which would mark a 15 per cent increase.

This sobering situation for LeEco is in stark contrast to the heady period from July to September last year when it seemed to be on a roll.

At that time, it clinched the Vizio deal, took over control of Hong Kong-traded smartphone supplier Coolpad Group, raised more than US$1 billion in funding for its electric car development plans and launched its smart TVs in the US.

In November, however, Jia warned that the company faced a cash shortage after expanding too fast. This included its ventures in smartphones, smart TVs, cloud and streaming content services, virtual reality headsets and self-driving electric cars.

“LeEco did not do enough research to understand the US market well enough before making the attempt [to expand its operations], and spent hundreds of millions of dollars in the span of a few months before realising what they were doing would not work,” said Ben Bajarin, principal analyst at consulting firm Creative Strategies in Silicon Valley.

“LeEco lacked what every company needs to enter a market — a strong brand. Even in China, this company does not have nearly as strong a brand as it thinks, compared with heavyweights like Huawei.”