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Li & Fung to Go Private Amid Sinking Stock Price and Global Pandemic

Venerable apparel sourcing giant Li & Fung is taking itself private, joining with Golden Lincoln Holdings (GLP), the companies said Friday after the close of trading on the Hong Kong Stock Exchange.

The plan calls for shareholders to comprise the Fung family, the controlling shareholder of Li & Fung, and GLP Ltd., a global logistics warehouse operator and investor headquartered in Singapore.

An newly established independent board committee will make recommendations to current shareholders as to whether the proposal is fair and reasonable, and whether to vote in favor a “founder arrangement” at the company’s general meeting and the plan’s approval by a court.

A “scheme document” will be sent to company shareholders as soon as practicable and in compliance with the government and legal requirements, laws and regulations.

Li & Fung is ultimately controlled by the Fung family, with 60 percent of voting shares, and GLP holding the remaining 40 percent of voting shares plus 100 percent of non-voting shares, resulting in GLP having an effective economic ownership of 67.67 percent of the sourcing giant.

Current shareholders will be offered 1.25 Hong Kong dollars (16 cents) per share to be paid in cash, a premium of approximately 150 percent over the closing price of 0.5 Hong Kong dollars (6.4 cents) per share on Friday as quoted on the Hong Kong Stock Exchange on the last trading day. That compares to 0.65 Hong Kong dollars (8.4 cents) at the end of February, 0.86 Hong Kong dollars (11 cents) on Dec. 31 and 1.18 Hong Kong dollars (15 cents) a year earlier. Li & Fung went public on Jan. 2, 2013, trading at 14.54 Hong Kong dollars ($1.86) per share. (Currency calculations are at current exchange rates).

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The privatization news came as the company reported financial results for the year ended Dec. 31. Li & Fung said its financial performance was affected by the multi-year trend of destocking and constrained customer sales, as well as record store closures and bankruptcies rocking the retail industry. This industry pressure was partially offset through market share gains with key customers, particularly in the logistics unit.

However, economic challenges have remained doggedly persistent. Core operating profit decreased 22.9 percent to $228 million for the year, largely due to reductions in sales and margin pressure in the supply chain solutions business.

Sales decreased 10.1 percent to $11.4 billion due to continued destocking by customers, store closures and customer bankruptcies, as well as the company exiting a number of higher-risk and non-strategic customers.

Total margin percentage improved 0.1 percent to 10.7 percent, primarily thanks to contributions from the higher-margin logistics business. Operating costs decreased 5.3 percent as a result of productivity gains from the new sourcing and production country platform.

Net profit was $17 million, representing a return to profitability. Adjusted profit fell 43.9 percent to $74 million, excluding non-recurring reorganization costs and other non-core operating expenses, write-back of acquisitions payable and bond redemption costs and corresponding tax and non-controlling interest impacts.

The logistics business delivered top-line growth and maintained profitability despite challenging and highly competitive market conditions. With strong demand for in-country logistics services, sales increased 3.5 percent to $1.2 billion and operating profit increased 1 percent to $94 million. The growth of the logistics business continued to be driven by strong growth momentum in China, e-logistics growth, expanded relationships with core customers in the ASEAN region, and solid results in the new markets of Japan, South Korea and India.

“The $300 million investment by Temasek validates the potential of the logistics business and will serve to accelerate its growth and enhance the group capital structure and financial flexibility,” the company said.

Li & Fung said it was “financially robust and maintains a strong balance sheet with $932 million in cash balance, as well as healthy cash flow, and over $1.5 billion in banking facilities providing adequate financial flexibility.”

The sourcing company has also continued to manage the ongoing impact of the U.S.-China trade war, increased complexity of global supply chains and, more recently, the COVID-19 pandemic. The strength of its global sourcing and production footprint has helped reduce the effects from these disruptions on its customers.

“While our financials were affected by strong headwinds in the retail sector and global markets, we achieved important gains in our goal of creating the ‘Supply Chain of the Future’ in our recently completed three-year plan,” Spencer Fung, Group CEO of Li & Fung, said. “We are successfully transforming from a traditional, analog agent into a unique digital supply chain service provider. We now have a leadership position in 3D digital product development and are delivering a suite of value-added services to our customers.”

Commenting on how the coronavirus outbreak is upending global supply chains, Fung said, “We are working around-the-clock with our customers and suppliers during this period of deep uncertainty. Our teams on the ground across the world are actively supporting customers…to help address the disruptions to their business.”