Li & Fung's Middle Ground

(Bloomberg Gadfly) -- Li & Fung Ltd. is returning to its middleman roots. That may look curious at first glance, as e-commerce upends the global retail industry and appears to do away with the need for sourcing agents. In fact, it's a smart strategy.

The Hong Kong-based supplier to Wal-Mart Stores Inc. and Macy's Inc. is selling its sweater, furniture and beauty businesses for $1.1 billion to a consortium owned by the 111-year-old firm's founding Fung family and Chinese private equity group Hony Capital Ltd. The company will pay a $520 million special dividend after the transaction. More than $170 million of that will go to the family, led by billionaire brothers Victor and William Fung, which controls about a third of Li & Fung.

Li & Fung's Middle Ground

While the deal will result in a one-time accounting loss of $610 million, the units being sold are more profitable than Li & Fung's main sourcing business, with core operating margins of more than 4.5 percent versus around 3 percent for the company as a whole, according to Bloomberg Intelligence analyst Catherine Lim.

Still, the price looks fair for businesses with declining profitability that would require significant working capital to grow. The sale was done at a multiple of 14.7 times enterprise value to Ebit for the 12 months through September. UBS Group AG analyst Spencer Leung said in a report Friday that he values the businesses at 12.1 times Ebit.

More importantly, with these "vertical" businesses shed, Li & Fung can concentrate on its role in managing the supply chain for retailers and improving its online capabilities. Last year, Li & Fung sold its distribution arm in Asia, and the year before, spun off its licensing unit, Global Brands Group Holding Ltd., for a Hong Kong listing.

Li & Fung's Middle Ground

With $580 million in cash that won't be given out as dividends, Li & Fung will have ample funds to weather the travails of its still largely global bricks and mortar clients like Wal-Mart, while having the capital to digitize and cut costs in what is still a labour-intensive sourcing business. It could buy technologies to beef up its logistics unit, too.

A more streamlined organization will also allow Li & Fung greater agility, and the ability to focus on growth areas. More resources will be available to develop the company's digital supply chain, where Li & Fung believes it can create additional shareholder value. Most importantly, according to UBS's Leung, the deal will let group CEO Spencer Fung gain more control over operations.

Turns out that being in the middle, if you do it well, isn't a bad place to be after all: Just ask a Wall Street broker.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at

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