Li & Fung buys Wear Me Apparel for up to $402 million

Consumer goods sourcing company Li & Fung is to acquire Wear Me Apparel, a US children's clothing company, the Hong Kong-listed company announced late on Monday. The consideration for the acquisition will be no more than $401.8 million.

Wear Me Apparel designs, markets and sells clothing for children -- primarily under the Kids Headquarters label -- and young men. It manages a large portfolio of national brands, proprietary brands, private labels and character licenses. Among the clothing brands that it manages are Calvin Klein, Timberland and Rocawear. It also makes clothes for Disney, Marvel and Nickelodeon. The finished products are sold in department stores and mass retailers such as Macy's and Wal-Mart. In 2008, the company generated net sales of $700 million.

Li & Fung said in a stock exchange filing that the acquisition will allow it to expand into new markets which will be of benefit to the company's existing portfolio of brands and private labels. From a financial perspective, the extra sales of $700 million a year will greatly increase the size of Li & Fung's onshore US business. It will also help the Hong Kong company reach its goal of receiving $3 billion worth of US onshore revenues in 2010.

Li & Fung will pay $101.8 million up front, which represents the value of the target's net assets, including an outstanding bank loan worth $100 million. The remainder will be a performance-based contingent sum of up to $300 million that will be paid in five annual instalments as long as certain pre-tax earnings targets are met. Li & Fung will pay for the acquisition with cash from its internal reserves. The deal is expected to be completed by the end of November.

The valuation of Wear Me implied by the acquisition price is very attractive, according to one research note published by Bank of America Merrill Lynch. Li & Fung is paying 1.8 times historical earnings and 1.3 times book, said the US bank. In fact, the price is just one-fifth of the amount talked about when Li & Fung was in discussions with Wear Me two years ago. The deal is "definitely its largest onshore acquisition and probably one of its cheapest acquisitions to date", BoA Merrill said.

The market response wasn't positive however: Li & Fung's share price dropped by 1.15% yesterday compared to a 0.8% rise in the Hang Seng Index.

This is not the first company that Li & Fung has bought since the advent of the financial crisis. At the end of last year, it paid $51 million to buy Miles Fashion Group, a German supplier of clothing for men and women.

And the management has suggested that more deals are in the pipeline. "We will continue to pursue our acquisition strategy and this deal is only one of the many opportunities that we are currently looking at," said Bruce Rockowitz, president of Li & Fung (Trading), in a written statement.

The brothers behind Li & Fung are also busy raising capital for another company that they control -- Trinity Limited. On Monday, the retailer of luxury menswear in China started the roadshow for an initial public offering that seeks to raise up to $100 million. The pricing is scheduled for October 27 and trading will begin on November 3.