Caixin
Apr 11, 2017 06:27 PM
BUSINESS & TECH

LeEco Scraps $2 Billion Vizio Purchase

Photo: IC
Photo: IC

(Beijing) — Online video company LeEco said Monday it has scrapped its $2 billion acquisition of U.S. television maker Vizio, in the largest such deal to collapse as China tightens capital controls to rein in a recent wave of overseas investments.

Analysts said the deal’s termination is the best possible outcome for LeEco, which needs to put its ailing financial health before the many heavy investments that led to its current cash crunch that began last fall.

In an announcement on Monday, LeEco and Vizio cited “regulatory headwinds” behind their decision to call off the $2 billion deal, announced during a flashy U.S. event in July. The deal is not subject to antitrust approval in China, and increasingly strict currency controls were the most likely obstacle in its way, analysts said.

“We continue to believe that there is great synergy between the two companies, and are pleased to announce that LeEco and Vizio have reached an agreement that is a win for both companies,” LeEco said. It added that the pair will continue to work in other ways that will allow LeEco to load its software onto Vizio TVs.

China introduced tighter restrictions on outbound investment in December to stop a drain on its foreign-exchange reserves and control the depreciation of its currency, the yuan. The government has advised Chinese companies to “make decisions prudently,” in an apparent reference to a wave of recent overseas purchases, many worth $1 billion or more.

“This may mark the beginning of a period when Chinese companies need to stifle the urge to make a splash with billion-dollar takeovers,” said blogger and industry analyst Wang Guanxiong. He added that rising uncertainties for outbound investments may force companies to simply form strategic partnerships rather make outright acquisitions.

Scrapping of the deal follows a similar development in March, when Dalian Wanda was forced to scrap its proposed $1 billion purchase of Golden Globe Awards production house Dick Clark Productions. At the time, Dick Clark said the Chinese buyer “failed to honor contractual obligations.”

Capitally Challenged LeEco is in the middle of a cash crunch, after growing too fast by entering a wide array of businesses like self-driving cars and smartphones over the past two years. Accordingly, many believe the collapse of the Vizio deal will give the company some breathing room to work out its financial problems.

“LeEco would have had trouble scraping together the funds to pull off the deal,” said Ma Jiguang, another prominent tech blogger. “It’s off the hook, and no longer has to worry about the funds and follow-up costs to support the merger, which are totally beyond its means.”

Many of LeEco’s ventures have been scaling down and losing business since Chairman Jia Yueting first admitted to a cash crunch in November.

Feng Xing, head of the company’s smartphone division, resigned on Monday, following departures of two top executives at LeEco’s sports division in March. In late February, the sports arm lost a $100 million contract to air the Asia Football Championships, as media reports said the company failed to meet several payment deadlines. 

On the day it confirmed scrapping of the Vizio deal, a separate media report said LeEco planned to slash a third of its U.S. staff after only generating $15 million in the market since its launch last fall, far short of its $100 million target. The company declined to comment on that report. Other media previously reported LeEco had laid off 85% of its employees in India, after little more than a year in the market.

Hard pressed for cash, the company has also reportedly amassed a large volume of unpaid bills, and at least two creditors have publicly said they will exchange all of their debt for LeEco shares.

Contact reporter April Ma (fangjingma@caixin.com)

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