Lenovo chases Packard Bell

By Judy Hua and Edwin Chan

HONG KONG (Reuters) - Lenovo Group Ltd. (0992.HK), the world's No. 3 maker of personal computers, wants to take over a mid-tier PC manufacturer valued at about $800 million to bolster a barely profitable European arm.

Its shares, which have seesawed since the firm released a strong set of quarterly earnings, stood 2 percent higher on Wednesday in a stronger market after the firm revealed it hoped to buy rival Packard Bell to strengthen its European operation.

If successful, the deal would allow the Chinese giant to quickly grab market share in a region where it is ranked sixth and barely profitable, while it continues to digest and revive a global PC business bought from IBM (IBM.N) in 2005.

But it could expose the firm to an intense battle for consumers with the likes of Dell Inc. (DELL.O), Hewlett Packard (HPQ.N) and aggressive Acer Inc. (2353.TW).

"It's like a cardiac stimulant. It will help Lenovo to guarantee growth, especially in Europe," said JP Morgan analyst Charles Guo. "And it should help them maintain their global No. 3 PC vendor position."

Lenovo, just starting to turn around its U.S. operations, said on Tuesday it was in exclusive talks to buy PC maker Packard Bell BV -- which IDC estimates ranks ninth in global PC sales with 2 percent market share -- from owner John Hui.

One of a handful of Chinese companies trying to forge a global brand by investing abroad, it dropped to fourth globally in the first three months of 2007 but reclaimed the No. 3 spot from Acer a quarter later, riding an upswell of corporate demand.

To drive sales to consumers, the company now plans to launch a range of notebooks in January and desktops in March or April.

Most analysts would not be drawn so soon on Packard Bell's price tag or on the bottom-line impact if a deal goes through.

"Based on an assumption that Packard Bell's topline is 1.5 billion euros ($2.06 billion), net margin is 2.5 percent and 15 times PE, the deal is estimated at $700 million to $800 million," said Cazenove's Zhao Xin.

But the price tag could change dramatically depending on its undisclosed bottom line.

PRICE TAG?

Lenovo Chairman Yang Yuanqing -- nicknamed "young marshal" when he became the firm's second-in-command to founder Liu Chuanzhi -- has driven the PC maker's global ambitions since unveiling the IBM acquisition in 2005.

Barely two years later, Yang, now surrounded by ex-Dell executives including Chief Executive William Amelio, is essaying his second major overseas purchase.

Packard Bell was once a leading PC vendor in the United States but withdrew from the world's largest PC arena in 1999 to focus on Europe. Deutsche Bank estimates it chalked up between 1.5 billion and 2 billion euros of revenue in 2006 and analysts say it would be a good fit for Lenovo.