Hillhouse, CDH propose $6.8b take-private of Belle International

A consortium comprising the two private equity firms and two executive directors at Belle, Wu Yu and Fang Sheng, are offering to pay HK$6.30 per share in cash for all outstanding shares in the company, according to a filing. This represents a 19.5% premium to the April 13 closing price. Belle has been suspended from trading since that day.

Yiu Tang, Belle’s founder and chairman, and Baijiao Sheng, the CEO, have agreed to vote in favor of the proposal and fully exit their combined 25.75% stake in the company. Yu and Fang Sheng together own approximately 2.66% and they will roll over those shares into the acquisition vehicle, alongside a 12.06% interest held by participating management shareholders.

In addition to the roll over equity, the transaction will be financed through HK$17.3 billion in fresh equity and HK$28 billion in debt financing provided by Bank of America. Should the deal go through, Hillhouse would control 56.81% of the company, with CDH owning 12.06% and management – including Yu and Fang Sheng – holding the balance.

Belle’s business is divided into two segments – footwear and sportswear and apparel, with a combination of in house brands and international brands – and both have struggled as the growth of e-commerce in China has reduced foot traffic in shopping malls. The company manages 20,716 retail outlets in mainland China, as well as more than 100 in Hong Kong and Macau, and it has posted 13 consecutive quarters of negative same store sales growth.

The consortium is promising “a fundamental transformation” so that Belle can compete effectively and remain the longstanding market leader for ladies footwear in China. In addition to contributing financial and operating resources, the consortium will work with the company to explore new retail models, invest in technology, infrastructure and talent, and introduce various other initiatives. It argued that this strategy can be pursued most easily under private ownership.

Belle generated revenue of RMB40.8 billion ($5.9 billion) for the 12 months ended February 2016, up from RMB40 billion the previous year. However, net profit plummeted from RMB4.76 billion to RMB2.93 billion. Footwear, which accounts for 51.7% of overall revenue, was hit hardest as same store sales declined more than 10% and gross profit margin fell by one percentage point. The company’s stock has lost 70% in value since February 2013.

“It has become clear that our traditional retail business model is in urgent need of integration with the digital economy, and an effective new strategy and execution capabilities will be necessary to enable us to compete in the long term. In choosing the right partner, it was important that the [consortium] demonstrated a long-term commitment to provide ongoing resources to support the company’s business and possessed the necessary expertise to bring it into the digital age,” Baijiao Sheng said in a statement.

CDH and Morgan Stanley Private Equity Asia invested $40 million in Belle in 2005, taking a 10.7% stake. When the company listed in Hong Kong in 2007, raising $1.1 billion, CDH bought another $10 million worth of shares as part of the offering. Over the ensuing years, the GP has gradually pared its holding.

CDH has also worked with Belle on other transactions. In 2013, they paid $161 million for a majority interest in Japanese apparel retailer Baroque Japan with a view to helping the business expand in China. When the company listed in Tokyo towards the end of last year, it had 336 stores in Japan compared to 328 three years earlier, while the Greater China presence had rocketed from 29 outlets to 143. Most of these are in mainland China, operated as joint ventures with Belle.

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• Topics
• Greater China
• Consumer
• Buyouts
• China
• CDH Investments Management
• Hillhouse Capital Management