Struggling Chinese television shopping and direct sales company Acorn International (ATV) has entered into a binding term sheet to acquire Yiyang Yukang Communication Equipment Company Limited, a Chinese communications equipment producer and distributor in China.
The transaction was first announced at the beginning of October 2008, and is now expected to close by the end of December 2008, subject to customary closing conditions. Upon closing, Acorn will pay to the current shareholder of Yiyang Yukang consideration of USD6.7 million in cash and 2,564,103 of its ordinary shares valued at a price of USD3.12 per share — or USD9.36 per each of Acorn's American Depositary Share — and shall pay up to an additional three earn-out payments equivalent to the maximum amount of USD44.1 million in a combination of cash and ordinary shares, contingent on Yiyang Yukang meeting certain earnings targets in 2008, 2009 and 2010 for each of the earn-out payments.
Additionally, Yiyang Yukang's board of directors will resign, and Acorn will have the right to appoint a majority of new board members, with the remaining to be appointed by Yiyang Yukang.
Acorn has been struggling as its second quarter 2008 net revenues were USD47.2 million, a decrease of 25.4% compared to USD63.3 million in the second quarter of 2007. Acorn's revenues fell in the second quarter of 2008 due to more intense competition in the TV direct sales industry as well as a tougher operating environment brought about by Sichuan's Wenchuan earthquake. Direct sales net revenues were USD37.6 million, down 27.6% compared to the second quarter of 2007. The decrease in direct sales net revenues was largely due to a 74.7% year-over-year decline in sales of mobile handsets, despite growth in its GPS products, cosmetics and posture correction products.
In addition, Acorn might feel some heat from Chinese electronics retail giant Gome rumored to be readying itself for a jump into TV shopping direct sales.
Headquartered in Shenzhen, Yiyang Yukang produces, processes and markets communication equipment, targeting mid-to-high end business users in China. With a network of 40 nationwide distributors covering nearly 20,000 retail outlets, Yiyang Yukang offers an extensive distribution network for mobile handset products in China. It is also the sole producer and marketer of the popular Uking handset series. With a licensed brand from Gionee, China's number one domestic handset manufacturer according to the GFK Domestic Mobile Handset Market Research, Yiyang Yukang produced its Gionee/Uking branded mobile series to tailor to the needs of the sophisticated business users with individualized and user-friendly features such as voice activation services.
In the near term, Acorn plans to continue to adopt a dual-brand strategy of marketing and distributing the Gionee/Uking mobile handset series. Over time, Acorn plans to build independently the differentiated and proprietary branded Uking mobile handsets, targeting at the mid-to-high end business users in China.
James Hu, chairman and CEO of Acorn stated, "Yiyang Yukang is an excellent addition to enhance both our product pipeline and brand portfolio. In the past year, we have developed a very positive working relationship with the team. Yiyang Yukang's Uking mobile series has also been one of the most popular items on our platform. Given the large market size, its TV appeal and the onset of 3G networks, mobile handsets will remain an important product segment for us."
According to the statistics provided by China's Ministry of Industry and Information Technology, China had over 547 million mobile phone subscribers with a rate of penetration of 41.6% of the population of China at the end of 2007. These numbers make China the largest mobile phone market in the world as well as an attractive industry for domestic and international mobile handset manufacturers. By the end of 2007, there were close to 87 domestic mobile phone manufactures in China competing across product, pricing and marketing channels according to China's Academy of Telecommunication Research of Ministry of Industry and Information Technology. Acorn believes that its integration with Yiyang Yukang and their specialized products will enable it to set a strong foothold in the highly competitive Chinese domestic handset market by offering more differentiated and well-marketed products for business users in China.