Li & Fung is a buying agency for consumer goods with its headquarters in Hong Kong and a network of over 70 offices in 40 countries. The payment of $247.8 million will be financed from internal cash reserves and the transaction effected through its 100% subsidiary, LF Centennial.
Li & Fung raised HK$2.77 billion ($356 million) in a share placement in September last year, with the stated aim of creating a war chest for future acquisitions. The issuance coincided with a spike in Li & FungÆs share price and was deemed opportunistic by market observers. But Li & Fung has earned a reputation with investors for earnings-accretive acquisitions and investors welcomed the offering, nonetheless. It would now seem that Li & Fung did indeed have a plan for the funds.
William Fung, group managing director of Li & Fung Limited, says the company "has been on the lookout for acquisition opportunities that would enhance its global diversification and allow it to maintain a much more balanced geographical mix of businesses".
Tommy Hilfiger has a significant market share in the US and a large European business. It is present across categories including womenswear, denim and childrenswear. Tommy HilfigerÆs existing buying offices, in Hong Kong, Taiwan, India, Bangladesh and Sri Lanka will be integrated into Li & Fung. Tommy Hillfiger currently sources from Hong Kong, Taiwan, India, Bangladesh, Sri Lanka, Tunisia, the US and Honduras. There are significant synergies between Tommy HilfigerÆs buying and sourcing locations and the existing network of Li & Fung, which is well entrenched in China specifically with 19 offices on the Mainland alone.
The acquisition will add significantly scale to Li & FungÆs sourcing volume and give it more bargaining power with suppliers. Li & Fung also hopes to strengthen its designer brand sourcing capabilities which it can then leverage to work with other brands.
The sourcing volume and earnings after tax for the Tommy Hilfiger business for the year ended March 31, 2006 were approximately $703 million and $31 million respectively. Li & Fung has paid a turnover multiple of 0.35 and a profit multiple of 8 times.
For fiscal 2006 Li & Fung had revenues of HK$55.6 billion (up 18% year-on-year) on which it earned a net profit of $1.9 billion. For the first six months of that period Li & Fung grew revenue by 19% to HK$28 million and net profits by 24% to HK$764 million compared to the comparable period of the previous year. Li & Fung is adding about 8% to revenues and growing profits by about 10% through the acquisition on a straight line basis, without imputing synergy-related additions.
In May 2006, Tommy Hilfiger was acquired by private equity firm Apax Partners in a $1.6 billion cash deal. Apax also owns Phillips-Van Heusen, Tommy Bahama, The Children's Place and other brands. The first move by the private equity firm was to delist the company from the Hong Kong and New York bourses, buying out all minority shareholders. At the time of the acquisition, performance of the Tommy Hilfiger range was under pressure from severe competition and it was widely assumed the private equity firm would focus on strongly controlling costs and restructuring, made easier in the private ownership format. The current move is in consonance with this strategy.
Moody's reiterated its A3 rating on Li & Fung. Elizabeth Allen, vice president at the ratings agency, comments: "This acquisition - which will be the second largest in Li & Fung's history - is consistent with its strategy and will further enhance its global scale."
Investors welcomed the move and Li & Fung shares gained 7% to a seven-year high of HK$29. Analysts were in synch and raised their price target for Li & Fung.