SAO PAULO/HONG KONG China's Lenovo Group Ltd agreed on Wednesday to buy Brazilian electronics maker CCE, as the world's No. 2 PC maker by sales bets that Brazil's promising consumer market can help revive its slowing profit growth.
The deal, announced in a securities filing, is valued at a base price of 300 million reais ($148 million), subject to adjustments. Payment, in a mix of stock and cash, could include an additional 400 million reais, depending on performance-based indicators over the four years ending in December 2016.
"Brazil has a positive growth rate (for PCs) even in the current relatively volatile environment," Lenovo chief financial officer Waiming Wong told Reuters in an interview. "If we really go for the high growth market, the big market, Brazil is obviously the candidate."
Lenovo's purchase of CCE, Brazil's largest domestic manufacturer of electronics such as PCs, DVD players and stereos, will allow the Chinese company to nearly double its share of the PC market in the world's sixth-largest economy.
The deal will also add mobile phones and televisions to Lenovo's product line in Brazil, where it recently announced plans to build a $30 million factory, helping it expand beyond its current focus on the corporate sector.
"In order to win in Brazil long term you have to have local manufacturing," Wong said, adding that the acquisition would boost Lenovo into third place in Brazil's PC market from 7th place currently. "When CCE came along, it definitely was a good fit."
The deal highlights the growing, yet uneven trade ties between Brazil and China, two large emerging economies. While Brazil benefited over the past decade from China's voracious demand for raw materials such as iron ore and soybeans, Chinese exports of manufactured products have hurt Brazilian industry.
The acquisition, which Lenovo expects to close in the first quarter of 2013, also comes at a time when Brazil's once-booming economy has lost steam.
"We aren't worried about that," Wong said. "We believe that Brazil has a bright future as one of the major emerging market economies. The relative slowdown in the economy has already been reflected in the valuation (of the deal)."
By expanding its operation in Brazil, Lenovo follows other Chinese electronics makers such as Foxconn, which makes products such as notebooks and tablets in a local factory and plans to further expand production into liquid crystal displays.
Lenovo plans to invest $100 million in research and development in Brazil over the next five years, Dan Stone, head of the company's Brazil unit, said in a press conference Wednesday.
China is still Lenovo's main sales driver, contributing around 42 percent of its total revenue, though slowing growth has sapped demand. In response, Lenovo has aggressively expanded into other regions, primarily through overseas acquisitions.
Lenovo values the Brazilian market for PCs, smartphones, tablets and SmartTVs at $124 billion.
"In recent years, we have established a No. 1 position in emerging markets, and we hope to do the same in Brazil," Lenovo said in a statement, adding that CCE's management team would be maintained. "We are attacking hard in the large, fast growing BRIC (Brazil, Russia, India, China) markets."
According to Morgan Stanley, Lenovo is close to breaking even in emerging markets, but Brazil is where the majority of its losses are incurred, largely due to high import taxes and weak distribution.
CCE, controlled by privately held Digibras, runs seven factories in Brazil and posted 1.6 billion reais ($788 million) in revenue in 2011. The company said it produced 774,000 PCs last year and expects to assemble 887,000 in 2012.
Shares of Lenovo closed down more than 7 percent in Hong Kong on Wednesday after NEC Corp sold its entire stake in the company in a deal worth 18 billion yen ($229.62 million). The market closed ahead of the CCE announcement.
($1 = 2.03 reais)
($1 = 78.3900 Japanese yen)
(Additional reporting by Alberto Alerigi in Sao Paulo; Editing by David Gregorio)