Tuesday, May 5, 2009

Wal-Mart Supplier Li & Fung Plans Acquisitions, Sees U.S. `Bottoming Out'

Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., is working on “plenty” of possible deals in the U.S. as the world’s biggest economy “bottoms out.”

“We see a lot of opportunities in the U.S. right now to buy things that we’ve always wanted to buy, at prices that we feel are very reasonable,” Company President Bruce Rockowitz said in a Bloomberg TV interview late yesterday. The company also has plans for acquisitions in Asia, he added.

Li & Fung yesterday announced plans to raise HK$2.7 billion ($348 million) selling new shares to fund purchases. Rockowitz is signing outsourcing deals and buying rivals, last month completing an agreement to supply Liz Claiborne Inc., whose brands include Kate Spade and Juicy Couture. Li & Fung made 62 percent of its HK$110.7 billion sales last year in the U.S.

The share sale “will further strengthen Li & Fung’s existing liquidity position and equity base,” Elizabeth Allen, a vice president at Moody’s Investors Service, said in a statement late yesterday. The share placement “will have no immediate impact” on the company’s A3 ratings, Moody’s said.

Li & Fung, which also supplies Inditex SA’s Zara chain and Gap Inc., is eyeing “acquisitions and some major outsourcing deals” as prices of assets have fallen globally, Rockowitz said. The agreement to acquire Liz Claiborne’s sourcing business may boost sales by $1 billion, the company has said.

Talbots Talks

Talks to become the primary supplier for Talbots Inc., the U.S. chain specializing in clothing for women aged 35 and older, may be completed within two months, according to the CEO.

Rockowitz, who returned from a trip to the U.S. yesterday, said he sees signs the world’s largest economy “is in a bottoming-out phase that’s going to last probably until the end of this year and then start to pick up next year.”

“We’re going to gain a lot of market share in the current weak time,” he added.

Discounters and “mid-tier” retailers are showing the most improvement, while “very high-end department stores” are still struggling, Rockowitz said, declining to identify any retailing companies. He said the company supplies “all the major retailers” in the U.S.

Standard & Poor’s Ratings Services yesterday said its A- long-term corporate credit rating and “stable” outlook on the Hong Kong trading company aren’t affected by the share sale, which it said increases Li & Fung’s “financial flexibility.”

‘Financial Flexibility’

Li & Fung fell 8.1 percent to HK$22.05 yesterday after the company said it will sell shares at a price of HK$22.55 each, 6 percent less than the May 4 closing price. Yesterday’s decline cut the stock’s gain this year to 66 percent, compared with a 14 percent rise for the benchmark.

UBS AG cut Li & Fung to “sell” from “neutral” on concern U.S. consumer spending will remain too weak to justify expansion.

The share sale “will dilute earnings by roughly 3.5 percent,” according to a note to clients yesterday from UBS analysts Spencer Leung and Erica Poon Werkun. “Recent conversations with industry sources suggest that U.S. sources will not spend at the level previously seen.”

U.S. consumers are still limiting spending on concerns over unemployment and decreasing income and home values. Purchases decreased 0.2 percent in March, the first drop this year, the Commerce Department said April 30.