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Chairman, Founder and Chief Executive Officer at China First Capital ( , a China-based international investment bank and advisory firm for capital markets and M&A transactions. China First Capital was established in 2007 and has its headquarters in Shenzhen, China.... More
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  • Pork Chopped. Why Did Hog Giant's WH Group IPO Fail To Entice Investors? -- Week In China

    -Pork choppedWhy did hog giant's IPO fail to entice investors?

    May 2, 2014 (WiC 235)


    During the world's biggest probate dispute a few years ago, a fascinated audience learned that Nina Wang, the late chairwoman of Hong Kong real estate developer Chinachem, paid $270 million to her feng shui adviser (and lover) to dig lucky holes. As many as 80 of them were dug around Wang's properties to improve her fortune.

    One of these holes - about three metres wide and nine metres deep, according to the China Entrepreneur magazine - was burrowed outside a meat processing plant in China.

    Why so? Chinachem was the first foreign investor brought in by Shuanghui bosses in 1994 to help the abattoir expand. Wang's capital would jumpstart the firm's extraordinary transformation from a state-owned factory in Henan's Luohe city into China's biggest (and privately-held) pork producer.

    Seeing Shuanghui's potential, Wang offered to acquire its trademark and then to buy a majority stake for HK$300 million ($38 million). Both proposals were rejected outright by Shuanghui's chairman Wan Long (see WiC201 for a profile of the man known locally as the 'Steve Jobs of Chinese butchery'). His rationale was that he wanted to "make full use of foreign capital, but not be controlled by it". Despite never owning a majority stake in the hog firm, he insisted on running the company his own way.

    Two decades have passed since Wan first courted Nina Wang's cash and in that time a range of new investors have bought into the company. Last year they helped Shuanghui to acquire American hog producer Smithfield for $7.1 billion (including debt) and in January the firm was renamed WH Group, ahead of a multi-billion dollar Hong Kong listing. But embarrassingly the IPO was pulled this week, as plans for the flotation went belly-up.

    Not bringing home the bacon…

    When WH applied to list on Hong Kong's stock exchange in January, the firm talked up the prospect of launching the city's biggest IPO since 2010. It kicked off the investor roadshow early last month intending to raise up to $5.3 billion. Four fifths of the total was to be used to help WH repay loans taken to finance the Smithfield takeover, with bankers setting the price between HK$8 and HK$11.25 a share. This was "an unusually wide indicative range" according to Reuters, but also a recognition of the uncertain outlook in the Hong Kong stockmarket.

    A few weeks later, the 29 banks hired to promote the IPO (a record) returned with lukewarm orders. WH was forced to cleave the offer by more than half. Excluding the greenshoe allotment, the new plan was dramatically less ambitious, and looked to raise between $1.34 billion and $1.88 billion. To boost investor confidence, existing owners also dropped plans to sell some of their own shares in the listing. WH's trading debut was pushed back by a week to May 8.

    But investors remained unenthused. Blaming "deteriorating market conditions and recent excessive market volatility" (the prefferred explanation for most failed IPOs), WH shelved its IPO on Tuesday.

    "The world's largest pork company has gone from Easter ham to meagre spare rib," the Wall Street Journal quipped.

    Were rough market conditions to blame?

    The failed deal was another blow for bankers in Hong Kong's equity capital markets, who have watched the planned IPO of Hutchison's giant retail arm AS Watson slip away and have seen Alibaba Group opt to go to market in New York instead.

    Volatile markets may have contributed to WH's decision to postpone the listing. Hong Kong's Hang Seng index dropped 4.5% between the deal's formal launch on April 10 and its eventual withdrawal on April 29, according to the South China Morning Post. Other IPOs haven't been faring well recently. Japanese hotel operator Seibu Holdings and Chinese internet firm Sina Weibo both pared back share sales last month, while the Financial Times notes that concerns about China's slowing economy have depressed interest in Chinese assets more generally.

    Nevertheless, investors were anxious about WH's investment story too and specifically whether the company's valuation was too high.

    One of the selling points of the original Shuanghui takeover of Smithfield was that it married a reputable American brand with a company that wanted to adapt best practices in product quality and food safety in China. But if one longer term goal was to improve the reputation of Chinese pork - and boost confidence among the country's jaded consumers - the more immediate business logic was to sell Smithfield's lower-cost meat into China, where prices at the premium end of the market are typically higher.

    "We plan to leverage our US brands, raw materials and technology, our distribution and marketing capabilities in China and our combined strength in research and development to expand our range of American-style premium packaged meats products offerings in China," the company said in its prospectus. "We expect [this] to positively affect our turnover and profitability."

    In recent months this strategy has faced headwinds, with prices going - from the pork giant's perspective - in the wrong direction. American pig farmers are struggling with a porcine virus that has wiped out more than 10% of hog stocks. This has sent US pork to new highs, meaning it's no longer so low-cost. In contrast, Xinhua notes that pork prices in many Chinese cities have fallen to their lowest levels in five years. As such, the commercial case for exporting US pork to China isn't as strong. So fund managers have needed more convincing of the value of the newly combined Shuanghui and Smithfield businesses.

    So WH's valuation was too high?

    Bloomberg said WH was prepared to sell its shares towards the bottom of the marketed price range, which equates to a valuation of 15 times estimated 2014 earnings.

    At first glance that doesn't look too demanding. Henan Shuanghui Investment, the Chinese unit of WH Group that is listed in Shenzhen, carries a market capitalisation of Rmb78 billion ($12.6 billion), or 20 times its 2013 net profit. Hormel, a Minnesota-based food firm that produces Spam luncheon meat (and is a key competitor for WH's American pork business) trades at a price-to-earnings ratio of 23.

    Hence China Business Journal concludes that WH priced itself as "not too high and not too low" among peers, especially if the company can generate genuine synergies between its China operation and its newly acquired American unit.

    But an alternate view is that these synergies aren't immediately obvious and that the new business model has hardly been tested (the Smithfield deal closed last September and exports to China didn't start until the beginning of this year). The criticism is that WH hasn't done much more than put Shuanghui Investment and Smithfield together into a holding vehicle, but is now asking for a valuation greater than the sum of the two parts. "Even at the bottom of the range, the IPO implies a valuation for Smithfield 21% above the price WH Group paid for the US pork producer barely eight months ago," notes Reuters Breakingviews. (And let's not forget, Smithfield was purchased at a 30% premium to its market price at the time.)

    Or as one banker put it to the FT: "It's like buying a house, ripping out the bathrooms and kitchen and trying to flip it for a premium six months later."

    CBN agreed that investors have the right to be wary: "The market simply has not had time to judge if there is meaningful synergy coming out of WH's units. Nor is there a single signal that WH has the ability to properly manage an American firm."

    Why did WH want to IPO so fast?

    This question brings us back to Shuanghui's transformation from a state-owned enterprise to a privately-held firm. In April 2006 a consortium including Goldman Sachs and Chinese private equity funds CDH and New Horizon paid about $250 million to buy out the city government's stake in Shuanghui.

    The leveraged buyout was an unusual example of a Chinese national brand (and market leader) being snapped up by foreign buyers. Shuanghui was stripped of its SOE status, with majority ownership passing to private and foreign investors.

    Century Weekly suggested last month that most of these Shuanghui shareholders "have waited patiently for at least eight years to exit". Perhaps running low on their reserves of restraint, they then introduced the Smithfield bid last year to great fanfare as the largest takeover yet of a US company by a Chinese firm.

    But as Peter Fuhrman, chairman of China First Capital, a boutique investment bank, told WiC at the time, this wasn't really the case. In fact the bid for Smithfield was a leveraged buyout by a company based in the Cayman Islands, not a Chinese one. And its main purpose was to facilitate a future sale by Shuanghui's longstanding investors.

    How so? WH's set-up is complex: the IPO prospectus features an ownership chart containing WH Group, Shuanghui Group and Shuanghui Investment (not to mention several dozen joint ventures and Smithfield itself). One of these entities is listed in Shenzhen, but the investor group has been looking for other ways to cash out. A key motivation in last year's dealmaking was that they thought they had found an alternative route via a Hong Kong IPO.

    And less than a year after the Smithfield bid, WH made its move, not least because it needs to reduce some of the debt incurred in buying its new American business.

    But many market watchers think it looked too hasty. "They rushed into an IPO and didn't spend time to actually create the synergy between the US and Chinese business," one fund manager in Hong Kong complained to FinanceAsia this week. "They wanted to float the stock to fund the acquisition and also let the private equity firms exit. But if WH Group is good, then ride with me. Why should I buy when you are selling?"

    Fuhrman's view is much more withering: "I just couldn't get over, in reading the SEC documents at the time of the takeover, the brazenness of it, the chutzpah, that these big institutions seemed to be betting they could repackage a pound of sausages bought in New York for $1 as pork fillet and sell it for $5 to investors in Hong Kong."

    And what of the boss? Wan Long and another director Yang Zhijun pocketed almost $600 million in share options between them last year after the Smithfield bid went through. (The move pushed WH into a loss in 2013.) The size of the compensation package is said to have also deterred some fund managers.

    What next for WH?

    Any attempt to resurrect the offering will have to wait until after its first-half results, meaning a possible return to the market in September at the earliest. There have been reports that the deal is more likely be postponed until next year. CDH, the company's single largest shareholder, told the Wall Street Journal that it refuses to sell its WH shares cheaply. "We have a strong belief in the business' fundamentals and its long term value," a spokesperson insisted.

    But China Business Journal says that WH now needs to focus on convincing investors that it has a good story to tell, including providing a clearer integration plan for Smithfield and Shuanghui's operations. The pressure will also increase to find alternative ways to retire some of the debt taken on to finance the Smithfield acquisition. Reports suggest that early refinancing was expected to reduce debt repayments by around $155 million on an annualised basis - or about 5% of last year's profit.

    WH may also use the delay to rethink how it goes to market next time, with the South China Morning Post reporting that senior executives have been blaming the banks for the breakdown. "Some of them were too confident, and even a bit arrogant, when they tried to price the deal and coordinate with each other," the source told the newspaper.

    Then again, the banks will be irked by the expenses inccurred on a deal that didn't happen. And in retrospect it looks to have been a flawed decision to mandate 29 of them. As WH has learned, it diffused responsibility and may have disincentivised some of the participants.

    Indeed, another comment on the situation is that the only winners from this IPO were the airlines and hotels that were used as part of the roadshow process.

    May 02 6:58 AM | Link | Comment!
  • Smithfield Hong Kong IPO Goes Belly Up -- A Refresher Course In A Crazy LBO I Castigated Last Year

    Read the Wall Street Journal Report:

    Read my article from last year here on Seeking Alpha:

    Apr 29 9:28 AM | Link | Comment!
  • 淘宝时代的传统零售竞争之路 — 21世纪网评论, The Slow-Motion Suicide Of China's Brick-And-Mortar Retail. My Chinese-Language Commentary In 21st Century Business Herald

    Peter Fuhrman (中文名傅成)




    自 2003年淘宝上线以来,不断上涨的网络消费占据零售市场的份额越来越大,而那些高端商场,却在这个慢慢衰退的过程中表现得一直很被动。根据商务部的数 据,到2015年网络零售额将占消费品零售总额10%以上。这个比例在与欧美国家相比是比较高的。2013年中国的零售总额达到23万亿元,每一个百分比 变化都将代表一个巨大的量变。并且,我认为电子购物的发展速度还会继续加快,将在2025年达到15%的比例,与之相对的,传统零售模式占据的市场份额将 继续缩水。两边此消彼长的量变演变为生死攸关的质变恐非耸人听闻。

    更 糟糕的是,到目前为止,传统零售似乎也还没有找出什么办法与电子购物相抗衡。每年的新增投入只是在重复完全一样的商场经营模式,而事实已经证明这种模式正 在承受更多的挑战。今年,又将有上百家高端商场开始动工或即将开业。这些商场里绝大部分是国内品牌服装和鞋包店,而这些店铺恰恰是在电子购物时代受冲击最 大的,他们面临的窘境将一级级传导,到那些高端商场的开发商,再到把大笔资金借给这些开发商的银行。

    为 什么这些零售商们没有更主动地为自己找寻出路?这种消极抵抗,甚至"鸵鸟"似的回避我们已经屡见不鲜。有太多曾经是行业巨头的公司在新的竞争者来临时不愿 或不能改变,最终辉煌不再。就像诺基亚和黑莓,在苹果推出iphone的时候他们却没有新的产品来吸引曾经的顾客,所以很快的,他们从行业巨头跌到了破产 的边缘。

    同 样的,中国的高端商场要想重返繁荣,他们也需要新的模式来吸引消费者。随着时间的推移,这个任务只会越来越难,因为电子购物正变得更简便更实惠,网购的消 费者也将越来越多。对于传统零售商和商场来说,雪上加霜的是,美国的投资者将在今年为中国的网购行业注入大笔的资金。阿里巴巴的IPO将有可能为其带来 200亿美元资金,除了雅虎和软银的老股交易外,其中很大一部分将会是新进入的资本,而这些钱将使阿里巴巴更多更好地服务于中国的网络消费。


    我 在美国、英国、中国都生活过很多年,与欧美的商场业态相比较,我认为中国传统百货和商场是十分缺乏竞争力的。中国的商场比较缺乏创新、甚至有些千篇一律, 有不少商场的整体设计感很差,让人不想在其中逗留。另外,商场内单独店铺的设计也大都比较单调、缺乏新意,商场里的进驻品牌也都是差不多的,丝毫不让人觉 得新奇和兴奋。

    2012 年以来中国GDP增速放缓,社会消费增速也有所下降,但商业地产的租金却不降反升。当物业方看到店铺的销售情况不是太好时,很多会通过上涨扣点1%-2 %来弥补扣点总量的下降,而此举无异于饮鸩止渴,这样一部分经营不善的商铺会更快被淘汰,而另一部分则可能会通过上调零售价(或减少折扣等)来应对上涨的 租金。而当商品的单价相比网络销售的同类商品单价不是缩小而有可能加大时,更多的消费者可能会减少线下购买而转移到线上消费,这样会导致零售商销售额进一 步降低。这样的恶性循环一开始,商场和店铺都会失利。

    中 国购物中心里所售卖的产品也需要改变。每个商场引入的品牌都千篇一律,每个商场都以有个H&M, Zaras 或者Uniqlo为荣,而忽视了多样化和核心竞争力的重要性。偶尔有几个新颖的品牌,还真假难辨,价格也跟其本来的价格相差甚远。如深圳一商场去年引入了 美国女士内衣巨头Victoria's Secret,随后被该品牌美国母公司在官网宣布并没有授权任何商家在中国内地经营分店,而这个所谓中国第一个旗舰店里的货品其实也是从美国买的过季货 品,价格却卖得比当季货品还贵好几倍。目前,Victoria's Secret美国母公司正在对在中国未取得授权就开起了店的这家经销商进行商标侵权诉讼。这样"不专业"的商场经营者也是中国很多商场无法做出自己的品 牌、脱颖而出的重要原因。

    网 购的兴起无疑给传统品牌和零售商带来了威胁,但这并不意味着他们只能束手待毙。网络推动的商业生态圈变化是一个世界性的命题,其实他们抬起头就可以看到国 外的同行们已经在这一轮变革中留下并正持续创造着许多经验。说到底,这还是一个对于消费者习惯和对竞争对手的商业分析问题。沃尔玛的创始人曾说:跟我们竞 争其实很容易,你只要做我们不做的就行了。WD Partners,一家专注于零售行业及消费者研究的公司的最新调查报告显示, 在amazon和ebay的冲击下,实体店在人们的消费习惯中依然胜出。有79%的受访者指出"即刻拥有"(instant ownership)是实体店最重要的吸引力;75% 认为"触摸及感受"是他们去实体店的重要原因;65% 认为实体店拥有更多的款式和折扣。

    这 让我想到我见过的一些实体店,他们的商品不允许触碰,或摆放得十分不方便拿取;有些服装店的试衣间狭小而简陋,并且数量极少,像是在说:"别进来,我们不 欢迎你试衣服。"这也许能减少一些日常损耗和费用,但同时,他们也自愿放弃了作为实体店最重要的吸引力之一。WD的调查还发现,网络购物在情绪上更为苍 白,而实体店则更激动人心,让消费者产生共鸣。这种情感的触及也许来源于产品本身,也许来源于店铺让人耳目一新的设计装修,也许来源于和店员的一次小对 话,不管怎么说,实体店有更多机会在购物体验上做得比网购更好。现在再想想许多装修简陋,服务懈怠的实体店,失去了自己的可发挥的长处,他们的消亡是必然 的。

    其 实说到底,传统的品牌零售商还是需要动脑筋。他们需要站在消费者的角度来看待自己的商品和服务,他们需要找到适合自己的策略。在那些成功的案例中,我见过 零售商通过直接开发自己的产品与亚马逊竞争,从而避免直接的比价,例如Lululemon和Victoria's Secret。还有其他许多在浪潮中存活并成长起来的品牌,像Abercrombie & Fitch, Hollister, Juicy Couture, Sephora等等,他们都有自己独特的地方,值得中国的同行去研究借鉴。

    中 国的传统零售行业和高端商场现在已是困难重重,他们需要的是改变和创新,改变计划经济时代和市场经济初期那种"我有什么你买什么"的俯视心态,创新出迎合 消费者感官和心理需求的"你要什么我卖什么的"服务型商场模式。我一直都认为,中国有着世界上最优秀的企业家,因此现在的困境也不失为一个机会,找出让消 费者重新走进商场店铺的方法,而这其中的回报,将是巨大的。


    Apr 23 3:56 AM | Link | Comment!
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