SINGAPORE (Apr 17): This past week, the International Monetary Fund (IMF) warned that the “Great Lockdown” recession this year will be the steepest contraction in almost a century. If the Covid-19 outbreak prolongs or worsens, global economic growth might contract by more than the 3% decline it now predicts.
It seems some shoppers in China did not receive the memo. Just one day after its flagship boutique in Guangzhou reopened, Hermes, the French luxury brand, chalked up a one-day single store record sale of RMB19 million ($3.8 million).
One shopper, who goes by the username Atomniu, stood out. She posted pictures of herself snapping up a black crocodile Birkin 30 handbag, as well as some clothes and shoes. She claims to have spent nearly RMB1 million. The record sales enjoyed by Hermes is believed to be this phenomenon of “revenge spending” — the pent-up urge to buy big after enduring a lockdown for more than two months.
Hermes fans were not the only ones shopping in China. While many big companies have put M&A deals on hold, some just could not resist signing on the dotted line of what they think is a good bargain, Covid-19 or not.
Meiji, the leading Japanese food and drinks producer, on April 14 said it is paying $254.4 million for a 25% stake in AustAsia Investment Holdings. Similar to Meiji, AustAsia is in the food production business — it specialises in producing raw milk. It owns seven dairy farms in China, with a total herd size of 80,000 cows. AustAsia is a subsidiary of Singapore-listed Japfa, which will hold on the remaining 75%, and will continue to operate the farms.
The raw milk from Japfa’s farms is a way for Meiji to secure a steady supply of the critical ingredient needed in the production of its range of dairy products ranging from drinking milk, cheese and ice cream.
According to Japfa’s CEO Tan Yong Nang, the funds from Meiji, already a large customer for years, will be used to pay down an existing loan of US$253 million ($361 million). With a stronger balance sheet, AustAsia can then embark on more active expansion. While acknowledging the Covid-19 pandemic is a worry, Japfa notes that its products are staple protein such as chicken, pork and milk, and day-to-day operations have not been “materially impacted”.
Interestingly, local property giant City Developments (CDL) on April 15 also announced the signing of a significant deal of its own — the acquisition of a controlling stake in Chinese developer, Sincere Property Group.
CDL’s investment in Sincere Property was first announced back in May 2019. Back then, the intention was for CDL to fork out a total of RMB5.5 billion for an effective 24% stake in Sincere Property.
Half the money was to go into a four-year interest-bearing loan amounting to RMB2.75 billion to Sincere Property, part of which would be converted into equity, and the remaining tranche of RMB2.75 billion to be invested upon fulfilling certain conditions.
“The transaction was expected to be completed in 4Q2019 but due to a variety of factors, was not consummated,” says CDL on April 15. It made the loan of RMB2.75 billion, but stopped short of getting a stake.
However, with markets in turmoil and economies tumbling, it seemed the Covid-19 outbreak helped manage to push the CDL–Sincere Property deal over the finishing line. “While there are challenges and uncertainties caused by the Covid-19 pandemic, China remains one of our key overseas markets and we hold a positive view of the longterm growth and market outlook there,” says CDL CEO Sherman Kwek.
This time round, terms of the deal have been revised. CDL will now pay RMB4.39 billion for a 51.01% stake in Sincere Property. It also has a call option to buy another 9% for RMB770 million, latest by July 1, 2022, or 18 months after the deal is completed. All in, CDL will pay RMB5.16 billion for a 60.01% stake, versus RMB5.5 billion for 24% that was the original deal. The price CDL is paying works out to almost 50% below Sincere Property’s net asset value.
Compared to other local developers like CapitaLand, which has invested years of effort in China, CDL’s exposure in the market is small. Kudos therefore to CDL to take the Covid-19 crisis and turn it into an opportunity to catch up with a competitor.
