Li & Fung sells non-core distribution business

Global sourcing giant Li & Fung got a shot of extra cash this week, selling its Asia consumer and healthcare distribution business to conglomerate Dah Chong Hong in a deal worth $350 million.

The Hong Kong-based supply chain manager, which sources products for big retailers like Walmart and Target, has been under pressure to offload its noncore assets. Li & Fung's Hong Kong-traded shares have fallen just under 40% in the past year amid sluggish top-line growth and weak operating results.

In that context, the deal appears to make sense. Selling non-core businesses would allow Li & Fung to concentrate efforts on its sourcing and logistics franchise, as well as helping the group cut its overall debt.

In a statement to the Hong Kong stock exchange on Tuesday, William Fung, chairman of Li & Fung, said the sale of the distribution business was "part of the group's strategic objective", allowing it to focus on its "core trading and logistics business."

Fung added that the all-cash deal would strengthen the group's cash flow and balance sheet, boosting its financial flexibility. Li & Fung's net debt rose to $1.11 billion at the end of last year, up from $896 million the previous year.

The spun-off business distributes consumer and healthcare products, including Coty's cosmetics, P&G's personal care products and Sanofi medications in Greater China and Southeast Asia.

Dah Chong Hong, a conglomerate with businesses ranging from supermarkets to car dealerships, has told investors the acquisition will quickly expand its consumer business, creating a better balance between motor and consumer products. It will fund the deal through a combination of internal resources and a term loan from banks.

The deal will reduce Li & Fung's revenue by about 10%, and net profit by about 12% assuming net margins of 2%, according to analysts at Citi.

The distribution unit's net assets rose to $321.1 million in 2015, up from $287.4 million the previous year, while its core operating profit fell to $16.1 million from $24.8 million, highlighting fierce competition in the regional consumer business.

Li & Fung's core operating profit fell 15% year-on-year to $512 million last year, while profit to shareholders declined 4.6% to $421 million for the same period, according to its latest annual results.

DBS advised Dah Chong Hong, while Morgan Stanley advised Li & Fung.