Three Private-Equity Firms Competing with 3Com for Ownership of H3C

I thought I had seen a report on this subject today on CNBC, but I couldn’t find confirmation of it online until now.

Anyway, the Wall Street Journal reports this evening that three US-based private-equity firms are competing to buy H-3C, the joint venture between U.S. networking-systems company 3Com Corp. and Chinese telecommunications-equipment maker Huawei Technologies Co.

As some of you will recall, I provided a post earlier today about 3Com’s desire to buy the remainder of H-3C.

Apparently, it was Huawei that invited the private-equity firms to the table, setting up a competition with 3Com for majority ownership of the joint venture. The private-equity firms are Silver Lake Partners, Bain Capital Inc., and Texas Pacific Group, and their offers range from $1 billion to $1.5 billion, which would appear to be more than 3Com had been preparing to offer.

3Com now owns 51% of the venture, which 3Com and Huawei set up in November 2003. Under the terms of a mutual agreement, 3Com and Huawei each has the right, starting Nov. 15, to launch a bid process to buy the other’s equity interest in the venture.

3Com already has signaled its intention to buy the remainder of the company it doesn’t already own. According to sources cited in tonight’s Wall Street Journal article, Huawei wishes to retain from 20% to 30% of the joint venture.

Huawei is based Shenzhen, and is China’s largest telecommunications-equipment maker, with sales of $8.2 billion in 2005. It began its rise by offering cheap knockoffs of routers, switches, and wireless base stations, among other networking products, but it increasingly has improved the quality of its products, which is still sells at a discount to offerings from vendors such as Cisco, Alcatel, Nortel, and others.

The Wall Street Journal’s sources expect the sale to of H3-C to close by year end, and, given the involvement of private-equity firms, they presume the deal will materialize as a leveraged buyout (LBO).

It could be that Huawei is merely positioning to get a better deal from 3Com. As the Journal reports, LBOs in China traditionally have been difficult to bring to fruition because of the difficulty in gaining management control, which makes bank loans to finance acquisitions harder to arrange.


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