LONDON (Breakingviews) - The French telecom equipment firm Alcatel has sold its stake in its joint venture in China just nine months after formation.

Alcatel has agreed to sell its 45 percent stake in its mobile phone joint venture to its partner, China-based TCL, for HK$63 million (6.4 million).

Alcatel agreed to place its handset business in the venture just nine months ago. At that time, Alcatel valued the cash and assets it injected into the joint venture at 45 million. The group said that it had the option of selling its stake in four years time.

The joint venture posted a 36 million net loss in the first quarter.

When Alcatel entered the venture to produce handsets, it injected 45 million worth of assets. It now emerges with stock in TCL worth around 6 million. The 85 percent writedown may sting, but staying in would have resulted in far higher losses.

The joint venture posted a 36 million net loss in the first quarter -- meaning Alcatel's share of the loss was 16 million. This is at a time when global mobile phone sales are booming.

The problem is that it sells less than 2 percent of all handsets worldwide, so it cannot compete on price against Nokia. And the joint venture focuses on the cheaper end of the market, where price is everything.

One suspects that losses will be far higher when handset growth eventually slows. Folding now looks like a smart move, even if it had to sell its share at a discount to get around a four-year lock-up provision.

The exit may not appear significant given Alcatel's market capitalization of 11 billion. But consider how large a headache divestment could have been.

The division was hardly a gem, so it is rather surprising the Chinese were even interested. And shutting it down would have been politically painful.

If Alcatel had sold the business straight to the Chinese, it likely would have encountered much more flack. Just look at all the problems that IBM encountered in selling its PC business to a Chinese company, and that was in the relatively non-dirigiste US.

Alcatel's exit is not a glorious end to Alcatel's long-running ambitions in handsets, but it does free the group from its imbroglio.

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