Pegatron Corp (和碩) is to sell half of its stake in a metal casing subsidiary to Chinese rival Luxshare Precision Industry Co (立訊精密), aiming to expand its computer components business in China and refocus its regional resources to tap into better growth opportunities, the company said in a regulatory filing released on Thursday.
Pegatron, which along with Hon Hai Precision Industry Co (鴻海精密) and Wistron Corp (緯創) assembles iPhones, said it would sell 50.013 percent of Ri Kai Computer Accessory Co Ltd (日鎧電腦配件) to Shenzhen-based Luxshare for 6 billion yuan (US$933.47 million) through a rights issue.
Ri Kai is fully owned by CaseTek Holdings Ltd (鎧勝控股), which was on Jan. 15 delisted from the Taiwan Stock Exchange after its takeover by Pegatron.
Photo: EPA-EFE
After the Luxshare deal, aimed to be completed by Wednesday, Pegatron would hold a 46.487 percent stake in Ri Kai and two seats on the metal casing manufacturer’s five-member board, it said.
Luxshare would control Ri Kai’s management, as it would hold its chair and two more board seats, Pegatron said.
Analysts said that Ri Kai’s earnings would no longer be consolidated into Pegatron and be booked as non-operating income, thus making a smaller financial contribution to the Taipei-based firm.
However, the deal would help Pegatron establish a closer relationship with Luxshare, which is expected to join the iPhone assembling business this year or next year, they said.
Daiwa Capital Markets Co said in a note that the deal would likely lead to 2 to 3 percent less annual revenue and operating profit for Pegatron, as well as a marginal effect on its net profit.
However, it would free up resources to explore other business opportunities, Daiwa said.
“While there has been a looming concern over potential competition from Luxshare in the iPhone business, the deal should comfort investors as competition between the firms would not be as cut-throat as some have feared,” Daiwa analysts led by Steven Tseng (曾緒良) said.
Pegatron might be able to pursue opportunities in other sectors, such as electric vehicles, they said.
Morgan Stanley analysts Howard Kao (高燕禾) and Sharon Shih (施曉娟) said that the deal might negatively affect Pegatron’s share price in the near term, but would be a step in the right direction.
“Pegatron is not putting more resources in the casing business because it is becoming incrementally more competitive and less profitable,” they said in a note on Thursday.
Pegatron owns a 0.57 percent stake in Luxshare.
A deeper partnership could open new business opportunities, such as the assembly of iPhone middle frame casings, and bodes well for its cash flow as the company does not need to invest heavily in the casing business, JPMorgan Securities (Taiwan) Ltd said in a note on Friday.
“The incremental business opportunity may offset the earnings dilution for Pegatron in the medium to long term,” JPMorgan analysts said.
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