Putting a whole new spin on the term 'technology leap-frog', TCL has entered into a second M&A transaction that sees it gain control of a French asset. Fresh from its success with TV manufacturer, Thomson, TCL has now entered into a strategic M&A alliance with Alcatel.
The Chinese consumer electronics manufacturer will pay $65 million for a 55% stake in a new JV, which will see it absorb Alcatel's mobile phone unit. Alcatel had spent the last six months in talks with Chinese consumer electronics companies to do a deal, and was introduced to TCL by ABN AMRO, its advisor.
"This is part of a trend," says ABN's head of corporate finance, James Pearson, "whereby major European and US multinationals are seeking to partner with Chinese companies. The key thing is they are looking to partner with sophisticated Chinese companies, and TCL is a very sophisticated company. The other key thing is that when they find these sophisticated companies they're willing to surrender control."
It is thought that in this case, the good experience Thomson had with TCL was transmitted through French business circles to Alcatel.
TCL wants to become one of the world's top five hanset makers, and ranks fourth in China. If you add TCL's and Alcatel's 2003 production together it comes to 17.5 million handsets, which puts it in the top 10, but still significantly off the fifth ranked player, LG Electronics which made 27 million.
What this deal does is to marry Alcatel's brand and distribution in Europe and Latin America with TCL Mobile's low cost manufacturing ability.
Alcatel currently makes handsets for the European market at a French factory - via an outsourcing arrangement with Flextronic which bought the French factory from it. The plan is to move all that manufacturing to China, where TCL boasts one of the lowest cost manufacturing facilities in the world. Meanwhile, TCL will keep Alcatel's 600 European R&D professionals, who bring a comparative advantage in design and flair.
The deal looks to be a classic win-win, with Alcatel exiting what it saw as a business for which it could never hope to achieve scale, and gain the economic upside of the new venture.
The venture in fact will be part of the forthcoming (probably third quarter) Hong Kong listing of TCL Mobile. According to the merger agreement, Alcatel will have an option to convert into the equity of the listco in year four. However, no precise details of the option or the percentage of TCL Mobile it represents have thus far been released.
The model of marrying Chinese low cost manufacturing with European brand and distribution has a long way to run. "There are many other similar types of transactions to this being discussed currently," says Pearson.
TCL was advised on the deal by Morgan Stanley.