Deal focus: China baby boom market comes of age

China's decision to end its one-child policy created an entirely new industry in mother-and-baby care (MBC) in 2015 and sparked a flurry of company creation and investment activity. Now, this ecosystem appears to be maturing with disarming speed.

Only three years into the boom, stakeholders are diversifying their playbooks on multiple fronts, and a secondaries market has emerged courtesy of private equity investors ahead of the curve. The latest action on this front includes Warburg Pincus agreeing to acquire 100% of Chinese MBC player Leyou in a deal that reportedly values the company at $200-400 million.

The sellers include The Carlyle Group and CDIB Capital, the latter of which acquired a 75% for less than $20 million in 2013. The exit could have been realized via an IPO in the US as early as 2015 but a coinciding flood of Chinese consumer internet companies looking to list in the country convinced the company to pull back.

Ryan Kuo, a managing director at CDIB Capital, says Leyou has always been keen to stay cash flow positive even in its online business, while many counterparts have proven happy to go public and burn through retail investor cash to support loss-making e-commerce plays. Although taking a hit in the online department for the sake of name recognition is a common enough approach among retailers, it never fit Leyou's more disciplined profile.

"It gets very tricky to IPO with online and offline stores because most of the retail investors think that the online business should grow faster, but actually that's not the profitable business," Kuo says, noting Leyou wouldn't have been able to maintain its online margins as desired in the US market. "The offline business is the profitable one, but they don't understand the model, especially in China."

Founded in 1999, Leyou is recognized as a leading MBC products retailer with about 580 self-operated and franchise stores across about 140 Chinese cities. The business model involves securing exclusive China distribution rights for branded baby food and related products imported from the US, Taiwan, and Australia. It also encompasses a range of proprietary brands, including Great Baby, Great Mama, and Great Family.

These brands have been the key to the online strategy. Leyou only markets its own products online, so customers cannot compare prices. The idea is part of a transition from a pure e-commerce play to a more online-to-offline (O2O) model, where brick-and-mortar stores create the brand recognition for a user base of some 10 million members who can then access a one-stop online shop.

This approach is also expected to facilitate MBC shopping for a broader range of generations as China's new baby boom unfolds. "China is a special market because it's not just mothers and fathers that raise the children, it's grandmothers, grandfathers, and grandmothers and grandfathers-in-law," Kuo observes. "When you go into a Leyou store, you don't just see young mothers and couples, you see grandparents buying things for their grandchildren."

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• Topics
• Greater China
• Buyouts
• Secondaries
• Exits
• Consumer
• China
• CDIB Capital
• The Carlyle Group
• Warburg Pincus Asia
• M&A
• e-commerce