HPE Is Selling Its 49 Percent Stake In H3C China Subsidiary

‘HPE is going to get bunch of cash - yet to be defined how much that is – the question is what are they going to do with that cash?’ says Future Tech CEO Bob Venero. ‘Will it be to acquire another company or double down on their cloud services business?’

Hewlett Packard Enterprise Tuesday said in a U.S. Securities and Exchange Commission filing that it intends to sell its 49 percent stake in its H3C Chinese enterprise IT joint venture.

H3C is the exclusive provider of HPE servers, storage and associated IT technical services in China.

HPE owns a 49 percent share in the company while Chinese company Unisplendour Corp. owns a 51 percent share.

The H3C sale could provide a financial windfall for HPE that could be used for acquisitions or other activities.

[Related: HPE Says ‘There Are No Discussions With Nutanix’]

Financial advisory firm UBS in a research note estimated the value of HPE’s 49 percent equity stake at $3.5 billion to $4.0 billion on a pre-tax basis or $2.50-$2.70 per HPE share after-tax.

“While we expect some debt repayment and share buybacks, given the recent press reports that HPE was interested in acquiring Nutanix, we believe HPE could use a large percentage of the proceeds to pursue a strategic transaction,” UBS said in the research note. UBS said given the steps required to close the deal, it does not expect HPE to receive 100 percent of the proceeds until late in fiscal year 2023 which ends Oct. 31.

The joint venture was formed in 2015 and, at the time, was valued at $4.5 billion (net of cash and debt).

The HPE H3C shares will be sold at a price per share of 15 times the profit of H3C as measured for the period ending April 30, 2022 divided by the total number of H3C share outstanding at the time.

Under the terms of the joint venture, HPE is expected to announce a purchase price within 30 days.

HPE shares were trading up four cents to $16 at mid-day.

The HPE H3C joint venture has allowed HPE to successfully compete in the fast-growing China-based enterprise IT market.

HPE has said H3C equity interest rose three percent in fiscal year 2022 to $265 million.

HPE Chief Financial Officer Tarek Robbiati told analysts in a December earnings call that H3C has contributed a “substantial amount” to earnings per share and free cash flow in fiscal year 2022.

“We will balance the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk,” said Robbiati in the call. “We will keep you up to date as we arrive at a longer-term solution for this asset.”

Bob Venero, CEO of Future Tech, Fort Lauderdale, Fla.-based Palo Alto Networks partner, No. 95 on the CRN 2022 Solution Provider 500, praised HPE’s decision to sell its 49 percent stake in the joint venture in the wake of geopolitical issues.

“I think its a good thing that they divest this business on the heels of everything that has happened in China from a geopolitical perspective,” said Venero. “HPE is going to get bunch of cash - yet to be defined how much that is – the question is what are they going to do with that cash? Will it be to acquire another company or double down on their cloud services business? It is going to be interesting to see how much cash they get and what they do with the cash.”

The original joint venture was set up by then-Hewlett Packard CEO Meg Whitman in 2015 with Tsinghua Holdings subsidiary, Unisplendour Corp., purchasing a 51 percent stake in H3C, at a $2.3 billion price tag.

The HPE decision to sell its 49 percent stake comes just two weeks after Foxconn, the world‘s largest contract electronics maker based in Taiwan, said its subsidiary in China has agreed to sell its entire equity stake in Chinese chip conglomerate Tsinghua Unigroup.

Taiwan‘s government in turn said it would fine Foxconn for an unauthorised investment in the Chinese chip maker.

In 2015, H3C had 8,000 employees and $3.1 billion in annual revenue made up of a complete portfolio of enterprise IT solutions, including networking, servers, storage and services.

HPE said it intends to consider the most appropriate use of such proceeds in line with its “practice of pursuing a balanced, returns-based approach for capital allocation decisions.”

Among the range of allocation activities for the cash include – but are not limited to- “organic and strategic investments, return of capital to shareholders, repayment and/or redemption of outstanding debt, and general corporate purposes.”

HPE said it expects the sale of its stake in the joint venture to take place in 2023, unless “extended pursuant to terms of the Share Purchase Agreement or required regulatory approvals.”