Supply chain manager Li & Fung said on Thursday it has agreed to sell three product vertical businesses, namely furniture, sweaters and beauty, for $1.1 billion in cash.
The earnings of these three businesses are relatively volatile and have been underperforming the rest of the group, so the sale should remove a drag on the earnings and performance of the listed entity.
The move is also in line with a broader simplification of the trading house which helps US retailers from Wal-Mart, Kohl's to Target to source their products. As chief executive Spencer Fung takes over the reins of the group from his father and honorary chairman of the company, Victor Fung, the family has been gradually hiving off non-core areas, creating a leaner cost structure and making it easier to manage.
Hong Kong-headquartered Li & Fung sold Global Brands in 2014 and divested its Asia Consumer & Healthcare distribution business in 2016.
Drastic action was needed, Li & Fung's share price fell 86% from its peak in 2011 to its lowest point in seven years in June. Competition for its clients from fast fashion, off-price and e-commerce entities in Li & Fung's core sales markets, Europe and the US, is pressuring its revenue and earnings.
Li & Fung changed its segmentation reporting in its latest interim results to align with its new priorities to try and break out more clearly the verticle businesses, and potentially lay the ground work for hiving them off.
Chinese private equity firm Hony Capital and the founding family's privately run Fung Group are taking the three business private. They could cut costs and potentially sell off parts, which would be more difficult to do as a part of a listed company.
If shareholders approve the deal they will receive a special dividend of $520 million or HK$0.476 per share.
At $1.1 billion the sale represents about a quarter of the listed entity’s market capitalisation. The valuation is about in line with the earnings multiple of that proportion of the whole group, said one person familiar with the sale process, excluding a run-up in the group’s share price since mid-November.
After paying the dividend, the group plans to use the remaining proceeds of about $580 million to invest in digitising its supply chain. Li & Fung is putting its roster of customers and vendors on a digital platform and applying advanced technological tools to shorten the supply chain cycle and capture market share. However, the benefits of these actions will take time to flow through to the company's financial performance.
Subject to shareholders’ approval, the transaction is expected to close in the first half of 2018. As interested parties the Fung family, which holds a third of the shares, cannot vote. For the transaction to clear it needs a simple majority from the shareholders gathered at the meeting.
Citigroup was the financial adviser to Li & Fung. Bank of China has agreed to provide financing.
