Shandong Ruyi Technology Group has agreed to buy a majority stake in French fashion group SMCP in a deal that points the way for other struggling Chinese textile producers by securing sales streams for its core business and improving its access to China's growing affluent.
Ruyi and SMCP have not disclosed how large a stake the former is acquiring in the latter, or exactly how much for. However, it is believed the company may be spending around $1.3 billion on the stake. Bankers familiar with the deal would not confirm or deny this reported figure.
Most of the shares in the acquisition will come from Kohlberg Kravis Roberts, the US private equity company that bought a 70% stake in SMCP in 2013 for just under €700 million ($795.46 million). Company founders Evelyn Chetrite, Ilan Chetrite, and Judith Milgrom own the remaining 30%, and they are reinvesting alongside Ruyi.
SMCP consists of a set of so-called accessible luxury fashion companies designed to appeal to middle-class buyers. The Paris-headquartered company, which reported 33% net sales growth in 2015, has been seeking to expand internationally for a few years.
Ruyi beat out an array of rival financial and corporate bidders to gain control of SMCP via a two-round auction process that began in late 2015. The French company had also filed paperwork for a listing on the Paris Stock Exchange, as KKR put pressure on potential bidders by keeping its exit options open.
A banker close to the deal said Ruyi succeeded in large part because it offers SMCP access to China's ballooning middle class. Meanwhile, SMCP and its accessible luxury brands Sandro, Maje, and Claudie Pierot provide Ruyi with a downstream outlet that it can use to appeal to this fast-growing bourgeoisie. The companies mostly focus on female fashion, often selling items at around the HK$3,000 ($386.83) mark.
KKR is exiting most of its stake in SMCP but will keep a minority stake. The banker said this was a sign of its confidence that the tie-up with Ruyi offered promising growth opportunities for the French company.
Paddling downstream
Ruyi is believed to have been looking for offshore clothes companies to acquire or merge with for years to help it expand beyond its traditional textile-making business.
“Ruyi realised a few years ago that converting cotton to yarn to make raw materials to sell to branded companies was very low margin and capital intensive and that it was going nowhere, particularly with the price of cotton deteriorating,” the banker said.
China's once dominant textile-making position has slipped due to intense pressure from regional rivals such as Vietnam, Cambodia, and Sri Lanka. That has left local jobs under increased pressure.
So to help secure its own future, Ruyi in 2010 bought a 41.18% stake in Japanese clothing company Japanese Renown for ¥5 billion (then about $44 million). It initially looked for a US acquisition too but this failed to materialise. However, when SMCP's potential sale emerged, Ruyi was quick to get involved.
Owning the end sales outlet offers certain inventory advantages for Ruyi. For a start, it can better control how much it produces and it has a captive seller in the form of its own new subsidiary.
The arrangement has the potential to work well for SMCP too.
“The company has around 400 stores in France but there's no reason it couldn't open up thousands in China, with the backing of Ruyi,” the banker said. “For SMCP it's a good deal too; the founders realised [that] going after Chinese women made sense, whether they were travelling or at home. And to capture the wallets of what could eventually be 500 million annual tourists requires a core brand in China itself.”
Perhaps the crux of the deal for SMCP's founders, however, was the promise by Ruyi to keep all the current management in place and basically leave the company to its own devices, except when it came to expanding in China.
“The endorsement of the management was key to the success of this deal,” the banker familiar with the deal said. "Without that they couldn't get the deal moving forward. Ruyi was keen to emphasise that they don't want to touch the company today, instead they have gone in to learn and observe, before they empower and grow the business.”
Ruyi's strategy of acquiring its way out of an industrial dead-end could well be replicated by other companies, either in the fashion space or through consolidation with higher end technology companies in the textiles space. That would be welcome news for the Chinese government, which is loathe to see the thousands of Chinese still employed in textiles losing their jobs.
Financing appeal
Ruyi's financial adviser JP Morgan is understood to have fully underwritten the acquisition financing package for Ruyi, which has to take into account and refinance an outstanding bond issue of SMCP.
In addition, Ruyi chairman Yafu Qiu had his company secure capital from Chinese funds to help ensure his company's offer stood above the competition's. Part of the reason he is believed to have won is because he felt he could offer more money and then make it back by helping SMCP to quickly expand sales in China.
“Chinese companies are aggressively supportive of these M&As and are entirely willing to lend to the major shareholder [in order for them to then buy shares in the target], which is an advantage because it is considered equity instead of debt financing [at the target level],” the banker familiar with the deal said. “And the owner can afford to pay a premium to the asset's value and recover it [by increasing the target's] selling into the Chinese market.”
Several other Chinese companies conducting offshore M&As have borrowed at the owner level in addition to leveraging up their targets with debt. Examples include WH Group, which acquired US pork foods manufacturer Smithfield for $7.1 billion in 2013, and Bright Food's acquisition of 60% Weetabix in 2012, which was followed by Baring Private Equity taking the remaining 40% of the business in 2015.
Ruyi was advised by JP Morgan on the acquisition, while Bank of America Merrill Lynch and UBS were financial advisers to SMCP and KKR.
Story updated to reflect the fact that Shandong Ruyi gained additional money from Chinese funds to support the purchase, not from Chinese banks.
