By Julie Zhu
HONG KONG (Reuters) - Huawei Technologies Co Ltd is in talks with Digital China Group Co Ltd (SZ:000034) and other suitors to sell parts of its Honor smartphone unit in a deal that could fetch up to 25 billion yuan (2.9 billion pounds), people with knowledge of the matter said.
Embattled Huawei is resetting its priorities in the face of U.S. sanctions and will focus on its higher-end Huawei phones rather than the Honor brand which is aimed at young people and the budget conscious, they said.
The assets to be sold have yet to be finalised but could include Honor's brand, research & development capabilities and related supply chain management business, two of the people said.
The deal may be an all-cash sale and could end up smaller, worth somewhere between 15 billion yuan and 25 billion yuan, one of the people said.
Digital China, the main distributor for Honor phones, has emerged as the frontrunner but other prospective buyers include Chinese electronics maker TCL and rival smartphone maker Xiaomi Corp (HK:1810), the people said.
The sources declined to be identified as the talks were confidential.
Huawei and TCL declined to comment. Digital China and Xiaomi did not respond to requests for comment.
The Honor brand was established by Huawei in 2013 but the business mostly operates independently from its parent. It competes with Xiaomi, Oppo and Vivo in China's highly competitive budget phone market and its phones are also sold in Southeast Asia and Europe.
Kuo Ming-chi, an analyst at TF International Securities, has said that any sale by Huawei of the Honor smartphone business would be a win-win situation for the Honor brand, its suppliers and China's electronics industry.
"If Honor is independent from Huawei, its purchase of components will no longer be subject to the U.S. ban on Huawei. This will help Honor's smartphone business and the suppliers," he wrote in a research note last week.
The budget phone industry operates on thin margins and Honor booked less than 5 billion yuan in net profit on revenue of about 70-80 billion yuan last year, said one of the people.
If successful in its bid, Digital China, which also partners with Huawei in cloud computing and other businesses, plans to finance the bulk of deal with bank loans and is set to secure the financing in the coming weeks, the people said.
Shares in Shenzhen-listed Digital China were up 6% in Wednesday afternoon trade.