Li & Fung Spin-off Debuts on HK Exchange

Shares in the newly-formed Global Brands Group shed nearly 14 percent of their value in their first day of trade.

HONG KONG—Shares in sourcing giant Li & Fung Ltd.’s Global Brands Group spin-off made a disappointing debut on the Hong Kong Stock Exchange Wednesday, shedding nearly 14 percent of their value in their first day of trade.

Global Brands’ shares slid almost 14 percent from their opening price of 2.09 Hong Kong dollars, or $0.27 per share, to end the day at 1.80 Hong Kong dollars, or $0.23, as Hong Kong’s overall Hang Seng index closed down 1.55 percent.
Li & Fung, historically a sourcing company, announced on March 20 that it was preparing for the spin-off of its global brands and licensing business. Li & Fung is not raising any new capital through the operation.  Each Li & Fung shareholder received one Global Brands Group share for every share it owns in Li & Fung.


While the offer failed to impress investors,  Bruce Rockowitz, who resigned as Li & Fung’s president and chief executive officer earlier this week to become ceo of Global Brands Group, was eager to talk up the merits of the operation.

“By separating we can grow faster on both sides,” Rockowitz said Wednesday. 
“There was always a concern in the past that if our brand business got too big, our customers on the sourcing side would feel uncomfortable that we’re becoming a brand company instead of a sourcing company. Because we were afraid of upsetting our own customers, we didn’t grow the business [as much as we would have liked],” Rockowitz said.
By spinning off into an independent company, Global Brands won’t have to be so concerned about such competing interests and will be free to open more stores or pursue more advertising, things Li & Fung shied away from in the past, Rockowitz argued.
“We felt the only way to be free and really do the right things to build the business would be to spin off,” he explained. As an example, he noted that Global Brands, a $3.3 billion brand company, has only 4 stores. “I don’t think there’s any other brand company like this,” he said.
Though now separate, Global Brands and Li & Fung will continue to be connected with “at least” 50 percent of Global Brands’ sourcing to be done through Li & Fung. In reality, the figure is closer to 80 percent, executives said.
“Over the years, this business has grown rapidly with sales over $3 billion, Global Brands has reached the point where it should be listed in its own right. We are confident that Global Brands will develop into a major player in the global brand and fashion space worldwide,” Li & Fung chairman William Fung said during the listing ceremony at the Hong Kong stock exchange Wednesday morning.
The impetus to spin off Li & Fung’s brand portfolio started as early as three years ago but was put on hold for some time while the company restructured its North American business. “We hope to make sure that the things that went wrong in the past don’t go wrong in the future. It is more volatile, but it’s a higher-margin business, so I think it’s an opportunity for investors to make their decision,” Rockowitz said in March.
Global Brands has a portfolio of more than 350 brands of which 80 percent are licensed brands in which the company enters into 2 to 8 year licensing arrangements. The remainder are “controlled” brands that are either owned outright by the company or under a long-term agreement of at least 10 years. The controlled brands portfolio is fairly new, added on in the last 5 years. Brands in the portfolio include Frye, Spyder, licensed characters from Disney, Coach, Juicy Couture and Calvin Klein.
Li & Fung has been known to be quite active in the acquisitions space but Rockowitz said that for both Li & Fung and Global Brands, the focus would be on organic growth for the next three years. He also said that the company is not looking at any particular acquisitions at the moment.
Analysts have mixed views on the spin-off. Aaron Fischer of CLSA wrote in a note last week that Global Brands is “now ready for a life of its own” and sees potential for the company to upgrade the license portfolio as well as greater potential for a ‘big win’ in the controlled brands division if one of the brands becomes a big hit.” Fischer has a buy rating on Li & Fung.
Taking a more pessimistic view is UBS analyst Spencer Leung who noted in May that Global Brands is taking on a higher proportion of Li & Fung’s liabilities – or 48 percent of the group’s net debt even though its size makes up only 15 percent of Li & Fung earnings before interest and taxes. Leung also noted that Global Brands faces increasing challenges in the private label business in the U.S.
Global Brands’ largest market is the U.S., making up about 85 percent of revenue. The company is “cautiously optimistic” on the outlook in North America, said Global Brands president Dow Famulak who noted that the market is starting to turn with categories such as white goods, home goods, large purchases and automobiles starting to turn. Apparel usually follows.
“It’s not wild growth but we’re seeing some very good steady growth,” Famulak said, forecasting “steady and continued growth.”