CDH’s big bet on e-commerce turnaround

By backing a $6.8 billion management buyout for Belle International, the private equity firm hopes to help the company revitalise its sales by embracing the online world.

Chinese private equity firm CDH Investments has embarked on the tough task of transforming one of the country’s biggest retailer networks with the help of e-commerce, after agreeing to support the management buyout of Belle International for HK$53.1 billion ($6.8 billion).

In what could be the biggest management buyout of a Hong Kong-listed company, CDH said on Friday after the close that it is teaming up with Hillhouse Capital to acquire all of the outstanding shares in China’s largest shoe retailer. Together with Belle's executive directors Yu Wu and Sheng Fang, who own a combined 2.66% stake in the company, it offered to pay HK$6.3 per share, or a 19.5% premium to the last quoted share price. 

The proposal caught the surprise of many analysts since Belle has fallen out of favour with investors. The company's share price has been on a downward trend over the last three years, shedding some two-thirds of its market value even as the rest of the market has remained largely unchanged.

There was also no obvious sign of a recovery in the near future, with senior management predicting a further 25% decline in earnings towards the end of this financial year. Belle currently has seven sell recommendations from stock analysts and, in what is an extremely rare case, the average 12-month target price was below its market price before the buyout was announced.
Belle's share price closed at HK$6.07 on Tuesday, more than 15% higher, after a long weekend due to Monday's Labour Day holiday.

With a physical network of 20,738 stores, Belle has a dominant position in China’s footwear industry and is often seen as a luxury brand in itself. It also acts as a local distributor for international sports and casual brands including Nike, Adidas, Converse, and Timberland.

Since its listing in 2007, the company has often been seen as a bellwether for China’s consumption market and the purchasing power of China’s burgeoning middle-class.

But more recently the company has become one of the biggest victims of China’s booming e-commerce sector. The rise of internet stores has boosted the sales of many non-branded shoes since many of these web-based sellers lack a physical presence and were previously unable to compete with Belle.

Belle's senior management have been notoriously reluctant to shift to e-commerce sales. Chief executive Baijiao Sheng admitted three years ago that he had underestimated the negative impact of e-commerce platforms on Belle's same-stores sales. But rather than build an online business, the company instead focused on revamping its brick-and-mortar stores and expanding its advertising and marketing effort.

As of today, Belle has still not yet established its own online sales platform, which is unusual for a top consumer brand that generates nearly $6 billion in sales every year. 

Tough roads ahead

CDH Investments appears confident that it can help turn Belle around by transforming its offline-only business model. In a statement, the private equity firm said it plans to pursue a series of transformative and innovative initiatives and make significant investments in technology to help Belle compete effectively in China’s rapidly changing retail landscape.

In order to facilitate what could be an extremely long and tough process of strategic transformation, CDH has teamed up with Hillhouse Capital, reputedly one of China’s leading technology-focused investment funds.

Hillhouse’s extensive experience with technology companies, gained from its investment in technology giants such as Tencent, Baidu,, Didi Kuaidi, and Airbnb, could help Belle explore the best possible solution for its online venture, sources familiar with the situation said.

Yet the transformation is unlikely to be easy. For one, Belle might have to let go of its luxury brand image in order to compete more effectively in the digital world.

Most luxury brands have an online presence but it is often a grudging presence. Because of the exclusivity and scarcity value that is attached to their products, they are more comfortable selling through bricks-and-mortar stores to ensure their goods are less accessible and to stop them mixing with the counterfeit goods that can be found in many online marketplaces. 

Establishing e-commerce sales channels also incurs extra costs. These could be in the form of discounts to customers (almost inevitable with online sales), additional marketing and advertisement expenses, and investment in delivery and logistics.

Sheng has previously said that Belle has no plans to cut prices or offer discounts despite stiff competition from online stores, suggesting the company might find it hard to expand online under his management.

While Belle’s extensive physical presence implies there is immense potential to develop the offline-to-online strategy -- drawing online shoppers to physical stores -- it also suggests a longer and more difficult transformation.

Belle will first need to cut the number of physical stores, something it has already been doing due to growing cost pressures. Belle closed 366 stores in the six months ending August last year, broadly two a day.

Deal details

The joint bid values Belle at about 18.7 times earnings on a trailing 12-month basis. On a price-to-earnings basis, the offer is more generous than other take-private deals such as Alibaba/Intime and Peak Sport, which were struck at multiples of 16.2 and 13.9, respectively.

Sector analysts said Belle is a perfect target for a leveraged buyout since it has a net cash of $1.1 billion (equivalent to 20% of the company’s market capitalisation) and is a strong cash flow business.

Under the buyout terms, the buyers will settle over half of the deal with a HK$28 billion debt facility from sole financial advisor Bank of America Merrill Lynch. They will also pay HK$17 billion in cash. 

Upon completion, Hillhouse will own 57% of the company, while CDH will have a 12% stake and the company’s management team will own 31%.

The joint buyers will need to settle all relevant approvals from shareholders and regulators before the October 16 long-stop date.

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