Sept. 2 (Bloomberg) -- Groups led by Bain Capital LLC and Silver Lake Partners are the leading bidders for a stake in the handset unit of China's Huawei Technologies Co. after General Atlantic LLC pulled out, people familiar with the matter said.

AEA Investors LLC, which had teamed up with General Atlantic, may try to join Bain or Silver Lake, the people said, asking not to be identified because the talks are confidential. AEA, which counts C.V. Starr & Co. and Qatar Investment Authority as partners, is considering pursuing its own bidding group, the people said. Offers for the unit of China's biggest phone- equipment maker will probably be submitted this month, they said.

The unit may be valued below the $4 billion estimated three months ago as slowing global economic growth, falling prices and rising material costs erode earnings at mobile-phone makers. Foxconn International Holdings Ltd., the world's largest contract maker of handsets, has fallen 69 percent this year and is the worst performer on Hong Kong's benchmark Hang Seng Index.

``The handset industry as a whole isn't looking good right now,'' said Jenny Lai, an electronics analyst at CLSA Ltd. in Taipei. ``Consumers have less to spend and that's putting pressure on pricing and margins.''

Providence Equity Partners, which was earlier bidding with Silver Lake, may also drop out before the deadline ends for the second round this month, two people familiar with the matter said. Other buyout firms including Kohlberg Kravis Roberts & Co., Carlyle Group, Blackstone Group LP and TPG Inc. either didn't express interest after being invited to make offers or didn't get past the first round, they said.

Multiple Advisers

Morgan Stanley is advising Huawei on the sale, while Bain's group has hired JPMorgan Chase & Co. and UBS AG. Deutsche Bank AG and Lehman Brothers Holdings Inc. are advising the Silver Lake- led group. Nick Footitt, a Hong Kong-based spokesman at Morgan Stanley, and Ross Gan, a spokesman for Huawei, declined to comment, as did spokesmen for the banks advising the bidders.

Unlike industry leaders Nokia Oyj and Samsung Electronics Co., unlisted Huawei makes handsets stamped with the brands of customers such as Vodafone Group Plc. Foxconn, which makes phones for Nokia and Samsung, has a business that's similar to Huawei's unit, said Frederick Wong, an analyst at BNP Paribas SA.

The Chinese company has sought to value the unit, which also makes wireless Internet cards and modems, at $4 billion or more, about 10 times estimated 2008 profit, people familiar with the situation said in June.

Valued At $3 Billion

Foxconn, which last month reported a 56 percent drop in first-half profit, trades at about eight times estimated 2008 earnings, compared with about 10 times in June, according to data compiled by Bloomberg. Based on Foxconn's current multiple, Huawei's unit would be valued at about $3 billion.

The buyout firms are still waiting for more operating and financial data from Huawei about the unit before submitting their second bids, the people said. They want more clarity on future profitability and what the unit's relationship with Huawei will be after the sale.

Shares of Nokia, which controls 40 percent of the global handset market, have also declined 37 percent this year amid concern that slowing economic growth will hurt consumer demand.

Huawei's sales in China, India and other emerging markets, as well as its position as the world's biggest supplier of wireless Internet cards that allow laptops computers to access the Web via mobile-phone networks, may lure investors to pay a premium for the unit, the people said.

Revenue at Huawei's handset unit doubled last year to $2.6 billion, according to research firm BDA China Ltd. The unit's sales accounted for 16.4 percent of Huawei's total in 2007, from 11.8 percent in 2006, according to BDA, citing data from Huawei, which doesn't publicly disclose detailed financial figures.

Going Abroad

Huawei, which won its first contract outside mainland China from Hong Kong's Hutchison Whampoa Ltd. in 1996, got 72 percent of its $16 billion in overall contract sales last year from overseas, according to the company's Web site. Its profit rose 32 percent in 2007 to $674 million, while revenue gained 48 percent to $12.6 billion.

Selling the stake to a U.S. investor may help Huawei win orders from U.S. mobile-phone operators, people familiar with the matter said in June.

A purchase may be the biggest by overseas buyout firms in China. Blackstone's proposed $600 million acquisition of a 20 percent stake in China National BlueStar Group Corp., a unit of China National Chemical Corp., is the biggest private equity deal in China so far, according to data compiled by Bloomberg.

Bain Capital and Huawei had previously made a joint $2.2 billion offer for 3Com Corp. That bid was abandoned in March after some U.S. lawmakers said they objected to the acquisition on claims it would put anti-hacking technology used by the Pentagon in Chinese hands.

To contact the reporters on this story: Cathy Chan in Hong Kong at Kchan14@bloomberg.net; John Liu in Shanghai at jliu42@bloomberg.net

Last Updated: September 2, 2008 06:51 EDT