China’s LeEco bets $2 billion on global potential of Irvine TV maker Vizio
As television maker Vizio Inc. prepared to go public late last year, fears about the Chinese economy turned the stock market sour.
Vizio halted its plan — but the temporary pause gave the Chinese technology company LeEco time to make a pitch to the Irvine firm.
Discussions stretching over six months and at least four cities on two continents culminated Tuesday in a joint announcement that LeEco would buy Vizio for $2 billion in cash, the latest major success story for Southern California’s technology start-up sector.
Financed by a co-founder mortgaging his home and popularized by its presence on Costco shelves, Vizio surged over 14 years to become the nation’s No. 2 television brand. The deal, expected to close in the fourth quarter, gives LeEco a dominant position in TVs and external speakers in the U.S. as the Beijing giant tries to match the likes of Apple and Netflix in international appeal.
“Their goal is global,” said Paul Gagnon, director of TV set research at IHS Markit. “It’s difficult for companies to quickly grow in overseas markets without a substantial brand investment. Acquiring Vizio … it’s a good way to grow quickly.”
But consumer electronics are only a small part of LeEco founder Jia Yueting’s expansive vision. The multibillionaire whose fortune comes from a string of ventures, including a telecommunications company, is pulling his empire into virtual reality gadgets, electric cars with an investment in Gardena start-up Faraday Future and a partnership with Aston Martin, smart bicycles and more. Over 730 million people, mostly in China and India, interact with LeEco products or services each month.
LeEco’s LeTV is best-known as the “Netflix of China,” with the rights to stream top-flight movies and sporting events, including Major League Baseball and the English Premier League. The company courts consumers through low-priced smartphones and TVs, with the goal of making money by charging for such content. It emphasizes seamless streaming across devices, and Vizio could extend that business model abroad.
Another division, LeVision Pictures, makes movies and is involved with Universal Pictures’ “The Great Wall,” a China-set English-language sci-fi epic starring Matt Damon that will hit screens in 2017.
LeEco began selling electronics to U.S. customers as it courted Vizio last fall. But building a quick rival would have cost upwards of $2.5 billion in marketing alone and had less than 10% chance of success, said Handel Jones, who consults on cross-border technology ventures. Vizio provides immediate access to 10 million smart-TV users, according to regulatory filings.
At a news conference at the NeueHouse social club in Hollywood Tuesday, Vizio co-founder and Chief Executive William Wang said he was reluctant to sell but that it was in the best interest of employees and shareholders.
Vizio plans to keep its brand and its 400 employees. Several executives could end up millionaires. Taiwanese manufacturing partners AmTran and an affiliate of Foxconn stand to gain from their nearly 30% combined ownership as of last September. Wang, who borrowed money against his house to get the company started, owned 54% of the firm as of last September and could come out a billionaire.
He’s set to lead a new company being spun out of Vizio that plans to commercialize viewing data collected from smart televisions. Wang would own 51% of the venture, with LeEco holding 49%.
The Taiwanese immigrant started Vizio in 2002 with former colleagues Ken Lowe and Laynie Newsome after lower-cost competitors undercut his computer monitor upstart.
Though its first TV bombed, Vizio emerged as a national powerhouse within years. Instead of assembling its own units like its competitors, Vizio relied on contract manufacturers in Asia to pare expenses. It beat TV giants in prices, luring customers and accepting narrower profits. At Costco, Sam’s Club and Wal-Mart, its colorful packaging stood out in a row of boring brown boxes. And its U.S.-based customer service kept buyers satisfied, the company said.
The Great Recession slowed things down. But in the first nine months of last year, Vizio brought in $2.2 billion in revenue and $44.3 million in profit, a regulatory filing shows. The firm readied an expansion beyond North America. It needed capital though.
Matthew McRae, chief technology officer and head of marketing, said Tuesday the company was prepared to hold an initial public offering despite a tough environment in which it may not have maximized returns. But by late Feburary, the structure of a deal with LeEco had been reached.
LeEco said it sold 3 million TVs last year, while IHS estimates Vizio sold 7.8 million sets on its own last year. Combined, they generated $4 billion in revenue during the fist six months of 2016, though they offered no future financial predictions. Both own about a quarter of their domestic smart-TV markets.
LeEco’s purchase further demonstrates the commitment of Chinese companies awash in cash to strengthen their brands and supply chains as they struggle to globalize independently, Jones said. Diversifying is a major priority as economic growth slows at home.
Over the last few years, several Asian companies have acquired well-known electronics brands.
In 2012, Royal Philips Electronics began transferring its TV business to Hong Kong-based TPV Technology. Last year, Toshiba Corp. said it would sell its North American and European TV business to Taiwan’s Compal Electronics Inc. This year, China’s Haier Group bought GE’s appliance business, and Foxconn paid $3.5 billion for Sharp Corp.
Jones of International Business Strategies said the Vizio price — which could rise an extra $250 million based on performance — is a great value compared to the estimated $5 billion Samsung Electronics has spent on marketing to become the nation’s most popular TV brand.
It’s so reasonable, he said, that others including Chinese brands Hisense or TCL seeking a bigger stake in the U.S. could try to outbid LeEco.
McRae declined to say whether other offers came in, stating only that “LeEco’s offer was deemed the far superior offer to anything else we had.” Vizio would have to pay an undisclosed termination fee if it backs out.
The two companies debated price as talks traversed meetings in Beijing, Hong Kong, Las Vegas and Irvine. They settled on an “aggressive” value that wouldn’t overextend LeEco’s balance sheet, said Winston Cheng, LeEco’s global head of corporate finance and development.
“We believe in the hard work of this team who’s been together for so long,” he said. “The partnerships they’ve built and the quality and trust they’ve built with consumers — there’s a lot of execution risk to build that [ourselves].”
Times staff writers Julie Makinen and Samantha Masunaga contributed to this report.
6:20 p.m.: This article was updated with additional context.
3:30 p.m.: This article was updated with staff reporting.
This article was originally published at 11:45 a.m.