Would LG sell off its handset unit?

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Would LG sell off its handset unit?

Amid continuing losses and falling market share, world number three under pressure to take more drastic action

By CAROLINE GABRIEL

Published: 31 August, 2011

READ MORE: M&A | South Korea | LG Electronics | Handset

LG reported a better than expected second quarter for its handset business but it remains an uphill battle, and now some shareholders are putting pressure on the world's third largest phonemaker to sell off the unit, or to take other drastic action such as buying a smaller player, or changing OS.

The second Korean OEM has failed, so far, to emulate the smartphone progress of compatriot Samsung, which also had a slow start in this sector. And some of LG's key strongholds, such as CDMA devices, are seeing market decline, while its core featurephone business is under pressure from Chinese white label rivals. Its overall handset market share fell from 7.6% to 5.6% between March 2010 and March 2011, according to Gartner. The firm ousted its CEO largely because of poor mobile performance, and has put significant efforts behind its Optimus Android range, launching high end models such as the 3D and the ultrabright Sol to join its original midmarket offerings.

But the results of all these decisions have so far been unimpressive. Although the Q2 results for the handset unit were better than anticipated, that was against a background of low expectations, and the division still made a loss of KRW53.9bn ($51m) (which was, at least, the smallest loss for five quarters). LG is aiming for sales of 1.7m 3D models by the end of the year, and a smartphone total for 2011 of 24m (itself a reduction of 20% on previous targets).

If it does not deliver on those targets, its investors may run out of patience. The handset business is a major value destroyer for them, and LG's market value is only about one-third that of rivals HTC and Nokia at $7.5bn, according to Korea Times, with cellphones seen as a major depressant on that figure, as well as being capex hungry. LG insisted this week that it was committed to the business, but Harrison Cho, an analyst at KB Investment & Securities, told Bloomberg: "Selling the lossmaking business is probably what investors want. But even with that option, LG wouldn't get much from the sale. They should have sold it long ago before the overall landscape got tougher. They simply missed the boat."

Other options suggested by activist investors include a defocusing on Android, in case the patents firepower of Apple and Microsoft is turned on LG as well as Samsung; or acquiring a smaller rival. LG was even rumored to be interested in differentiating itself by buying Hewlett-Packard's webOS, a prospect a company spokesperson said was "an interesting scenario" but not in its plans. Acquisition potential is also limited by LG's relatively small cash reserves - it had cash and cash equivalents of KRW2.2 trillion ($2bn) as of the end of June, as well as KRW21 trillion in total debt.

LG's handset sales, at about $3bn, represented about one-fifth of the group total in Q2 and the unit is expected to regain profitability next year. However, dwindling confidence that it will return to the black any time soon has helped to depress LG shares below their book value to a record low multiple of 0.9 times its book value, below that of other troubled handset makers such as RIM (1.6 times) or Nokia (1.1 times) and way behind HTC's 8.2.