SHANGHAI — Li & Fung, a giant in global supply chain solutions, is moving to privatize its business in a deal worth $7.22 billion Hong Kong dollars, or $930 million, its chief executive officer Spencer Fung shared, as the firm grapples with the unprecedented challenges of the coronavirus outbreak which has compounded pre-existing difficulties from the U.S.-China trade war and upheaval in the retail sector.
A consortium of the Fung family, which founded the business, and Singapore-based GLP Pte Ltd., an investment management firm specializing in logistics, has offered 1.25 Hong Kong dollars per share to take the firm private — a premium of about 150 percent to the stock’s last closing price. The deal is subject to shareholder approval and other conditions, and would result in GLP having an effective economic ownership of 67.67 percent, while the Fung family controls the remainder.
The Hong Kong-headquartered and listed company announced the news along with its full-year 2019 earnings, which missed company internal targets and analyst estimates, even before taking into account the global disruption caused by the coronavirus hitting multiple major economies.
Turnover for the year ended Dec. 31, 2019, was $11.4 billion, down 10.1 percent from a year ago. Core operating profit declined by 23 percent to $228 million although net profit to shareholders returned to positive.
The U.S.-China trade war has created difficulties in the business as nearly 80 percent of its supply chain services revenue is generated by the U.S. Meanwhile, Li & Fung has also been contending with scores of its customer bankruptcies as the likes of Amazon eat up retail market share.
The company has undergone significant restructuring over the years to adapt to the digital age. In 2014, it spun its consumer brands management division into a separately listed entity, Global Brands Group; and in 2017, it privatized its sweaters, beauty and furniture product verticals in a sale to the Fung Group and Hony Capital.
The company’s 2017 to 2019 three-year plan included a $150 million investment to digitize and increase the speed of their supply chain, helping customers switch to 3-D digital sampling as well as expanding its sourcing base to other countries beyond China.
“COVID-19 is causing unprecedented global simultaneous supply and demand disruption,” Fung said, speaking via digital conference. “If you spend a few more seconds to look at this sentence, these words have never been together in one sentence.
“Global demand will drop for a few months, causing some major uncertainty,” he said. “Most retailers globally are now reassessing their supply chain for the next few months. Mid-tier and nonessential goods will be hit the hardest. On the other hand, logistics in China is recovering fast but uncertainty is rising in the rest of Asia.”
The ceo added that the company, which has $932 million cash on hand and more than $1.5 billion in banking facilities, would be “deferring all nonessential expenses and capital expenditures and we’re very focused on cash preservation on the next few months.”
Founded in 1906, Li & Fung first began as a porcelain and silk trader, growing into a behemoth operating one of the most extensive supply chain networks in the world — encompassing 17,000 people in 40 different markets. Its client list is a who’s who of the consumer goods sector ranging from Walmart and Nike to Macy’s.
Bank of America Merrill Lynch said today in a report it expects global GDP growth to drop effectively to zero this year, matching the major recessions of 1982 and 2009. That forecast is based on the scenario that COVID-19 is contained enough by the end of April and the global economy will start picking up in May from extremely depressed levels.
“China’s data for the January/February period are a good foretaste of what to expect in the U.S. and Europe for March and April,” wrote Merrill Lynch economist Ethan Harris. “Data covering the early part of March has already weakened substantially.”
Harris continued: “It is still not clear how effective mitigation efforts will be. China enacted a dramatic lockdown, which is very hard to mimic in a liberal democracy. [South] Korea has a much better mitigation system than most countries.
“As this goes to press, the general public outside of China is just beginning to get the message. Again the Euro area leads the U.S., in part because of the tragic example of Italy and in part because politicians have been much quicker in the Euro area to offer a consistent message of concern.”