TCL Electronics acquires TCL's mobile phone business with its left hand and sells its TV OEM business for RMB 2.5 billion with its right hand

On June 29, TCL Electronics announced that the company, Zhengjia Investment and TCL Industrial entered into an acquisition agreement on June 29, 2020. TCL Electronics intends to acquire 100% of the shares of TCL Communication, a wholly-owned subsidiary of TCL Industrial, for RMB 1.5 billion; at the same time, TCL Electronics will transfer 100% of its shares in Mogia International to TCL Industrial for RMB 2.5 billion. Mogia is currently engaged in the production of TV OEM (ODM) business.

The net cash raised from the above transaction is RMB 1 billion. TCL Electronics' brand TVs will be combined with TCL Communications to fully expand 5G, artificial intelligence, and the Internet of Things (AI x IoT) business. The sale and acquisition are mutually conditional, and the ultimate controlling shareholder TCL Holdings, TCL Industrial and the company have entered into a non-competition agreement.

At the same time, TCL Electronics will sell its 100% stake in Mogia International Co., Ltd. ("Mogia International", which mainly engages in TV OEM business) to TCL Industrial for RMB 2.5 billion, and TCL Industrial will pay in cash. 

The announcement shows that TCL Holdings is an investment holding company with a diversified investment portfolio. Its investment businesses mainly develop, manufacture and distribute audio/video products, electronic products, communication equipment, home appliances, provide cloud video conferencing services, smart manufacturing solutions, solid waste dismantling and disposal, building and industrial park development and leasing, supply chain finance, etc. As of the date of this announcement, TCL Holdings, through its wholly-owned subsidiary TCL Industrial, holds approximately 53.15% of the issued shares of the Company and is the ultimate controlling shareholder of this announcement. 

TCL Industrial is a wholly-owned subsidiary of TCL Holdings and is also the direct holding company of Zhengjia Investment. Zhengjia Investment is a wholly-owned subsidiary of TCL Industrial and is also the direct holding company of TCL Communication.

TCL Technology is a technology innovation industry group focusing on the semiconductor display and material industries, and uses the industry as a driving force to develop industrial finance and investment businesses. TCL Technology's subsidiary, China Star Optoelectronics, leads the global semiconductor display industry. 

Relationship between the Company (TCL Electronics), TCL Holdings, TCL Industries and Zhengjia Investment

TCL Electronics said that the company decided to sell Mogia International Group after carefully evaluating the overall strategic fit and business prospects of Mogia International Group. Although the foundry business has remained profitable, it has become increasingly challenging for the company to manage due to the significant conflict of interest caused by direct competition between TCL brand TVs and customers. TCL Electronics believes that the sale is in the best interests of the company because it will allow the company to focus on developing its own TCL brand products while reallocating the proceeds from the sale to further strengthen its core business and seize growth opportunities in mobile communications, thereby creating maximum value for shareholders. Several Taiwanese electronics manufacturers that have been operating both brand and foundry businesses have also taken similar actions, such as Wistron Corporation's spin-off of Wiwynn Technology Services Co., Ltd. and Asus Computer Corporation's spin-off of Pegatron Corporation, to resolve conflicts of interest with external customers.

In 2019, TCL Electronics ranked among the top three in the world in terms of global brand TV sales. Therefore, the company has been reviewing its own strategy and looking for new resources with key synergy potential with its core business to further realize its "AI x IoT" strategy. The company has also been studying traditional and new competitors facing its TV business, including Samsung, LG and Xiaomi. Samsung and LG's TV business and mobile phone business are both under the same listed company, and Xiaomi's entire product ecosystem also belongs to Xiaomi's listed company. The above structure is widely adopted in the industry, which can be used to build a strong ecosystem and maximize synergy benefits. TCL Communication Group provides a platform for the company to achieve its strategic goals, allowing the company to fully leverage the synergy benefits with the TV business in terms of market coverage, distribution channels, customers, products and technologies, and financial performance. It can be seen that if the company wants to compete effectively in the TV and smartphone businesses and become an expert in full-scene display, it must leverage TCL Communication's advantages and strengths in the smartphone field. 

When TCL Industrial decided to privatize TCL Communication in 2016, the business faced challenges in the economic environment and headwinds from unfavorable market conditions in some countries. After being privatized, TCL Communication took a series of restructuring measures, such as selective market exit, sales channel restructuring and other cost reduction measures. As a result, TCL Communication's business performance has improved significantly in the past three years, from a net loss of HK$2.3 billion in 2017 to a net profit of HK$179 million in 2019. The fundamentals of the business are now solid, and the overall market conditions are also turning in a favorable direction for TCL Communication, especially as 5G technology begins to sweep the world. The company believes that now is the right time to acquire TCL Communication because after the restructuring efforts in the past three years, TCL Communication is ready to thrive in the target market segments and realize the company's "AI x IoT" strategy, laying a solid foundation for its future growth and profitability. 

In short, this business innovation is an important part of TCL Electronics' strategic planning, helping the company's smart scenes to extend from home to mobile outdoor and commercial use, creating a full-scenario smart life for users. At the same time, through business innovation, the company has focused on brand business, and has also gained a more dimensional global layout, higher-level technology and product levels, and a more optimized revenue and cost structure, moving one step closer to the company's vision of "becoming a world-leading smart technology company."