Private equity firms line up for Huawei unit sale
By Michael Flaherty and Vinicy Chan
HONG KONG, June 5 (Reuters) - Bain Capital and TPG Capital [TPG.UL] are among private equity firms lining up to bid for a stake in the mobile devices unit of China's Huawei Technologies, sources with direct knowledge of the process said on Thursday.
The fast-growing unit produced revenues of more than $2 billion last year, the sources said, more than double what it notched in 2006. One source said the unit has cash flows of around $250 million.
While the process is in its early stages, with first-round bids due at the end of this month, sources say private equity interest is heavy in what would be one of the largest inbound acquisitions in China so far this year. None of the sources wanted to be named because of the deal's sensitivity.
"Its handsets unit shipments jump more than 50 percent every year. So the bid will definitely draw fierce competition as everyone would love to share a slice of the big pie," said Alvin Kwock, an analyst at JP Morgan.
Privately held Huawei [HWT.UL] has hired Morgan Stanley to sell a majority stake in the unit, which is made up of five business groups -- mobile handsets, data cards for laptops, and routers for home use among them.
First-round offers can only come from individual companies or buyout firms, sources say, as Huawei and Morgan Stanley are trying to avoid a swarm of bidding groups and their bankers.
Bidders may be allowed to team up in the second round.
The company hopes to use the investment to help it expand abroad, especially in the United States, where it only has a tiny footprint compared to its reach in Europe.
Huawei and Morgan Stanley declined to comment.
Huawei provides telecommunication networks to 35 of the world's top 50 operators with over one billion users worldwide, according to its website. It initially built itself by selling to Chinese and other emerging market customers at prices below those of foreign competitors such as Ericsson (ERICb.ST) and Motorola (MOT.N).
As of March 2008, Huawei had 82,787 employees. The firm expects contract sales to rise 44 percent to $23 billion in 2008.
Founder and Chief Executive Ren Zhengfei is a former Peoples Liberation Army officer, a past that is seen as giving the company close links to the government.
That perception, coupled with its insistence on staying private, has made Huawei a tough business for some private equity firms and their bankers to understand and work with, sources say.
RARE BIG DEAL?
Its mobile business appears to be a nice fit for buyout firms in Asia, however.
The business has strong cash flows and growth potential, and would also be a rare big-ticket deal in the region. Western buyout firms in Asia have loads of money to spend and have had few opportunities to do so lately, thanks in part to a dearth of willing sellers in China and India.
Two sources close to the deal said Bain Capital is seen as an early front runner, based on its relationship with both Huawei and Morgan Stanley.
Bain teamed up with Huawei in a bid for U.S. telecoms gear maker company 3Com (COMS.O) last year, but the deal was abandoned after U.S. regulators blocked it. Bain Capital's top executive in Asia is Jonathan Zhu, Morgan Stanley's former China chief executive and a veteran of telecom sector deals.
But Bain will have plenty of competition, sources say, with rivals such as TPG Capital, Providence Equity Partners, and Permira [PERM.UL] preparing to bid. The private equity firms declined to comment or could not immediately be reached.
Although some telecoms companies are expected to look at the asset, sources say few have shown up early on.
Shenzhen-based Huawei competes head to head with Ericsson, Alcatel-Lucent and Nokia Siemens Networks [NSN.UL]. Huawei clients include Vodafone (VOD.L) and Telefonica (TEF.MI).
The firm has built a large research and development centre in India with a plan to triple staff there to 2,000 by the end of 2008. It also has R&D centres in Dallas, Stockholm and Moscow. (Editing by Tony Munroe and Quentin Bryar)
