Renown

Following sales of struggling firms Laox and Honma Golf to Chinese companies, 40% of Japanese-based Renown, a textile and apparel company, was sold to Shandong Ruyi. This was widely reported, as per the Daily Yomiuri, as a result of poor financial performance by the Japanese firm for several years and the interest in a Chinese textiles-maker in expanding existing Japanese brands in China. The Financial Times shares that Shandong's president, Qiu Yafu, had expressed interest in Renown's brands, distribution network and management expertise. This is in spite of a number of dispositions Renown has made in recent years, including real estate assets and brands such as Aquascutum. The motivations of buyer and seller are also listed and explained in Renown's Investor Relations release (although less accessible since it is only in Japanese).

Of course, this trend of Japanese companies selling themselves to overseas firms (and in particular, to Chinese firms) makes complete sense; many Japanese firms continue 1) to be poorly-capitalized, and 2) need to expand sales - preferably in a high-growth market such as China. Also, for a Chinese buyer, the transaction highlights an M&A play that will increase over the next several years - the purchase of technology and other intellectual property, brands, manufacturing and management expertise, which enables 1) sales of said product/services domestically in China, and 2) moving manufacturing and other functions on-shore to China to lower operation costs and maintain global competitiveness.

Also of interest is the sales price. Shandong Ruyi is purchasing 40% of Renown through new third-party allocated shares. Why 40% instead of a majority-enabling 50%+, or 100% of shares to make a wholly-owned subsidiary? Perhaps it is to maintain a buffer for its public status under Tokyo Stock Exchange listing requirements. Perhaps this allows Renown full control without linking future potential losses to parent company. Or perhaps the buyer believes this is the right value for brands, technology, distribution network and other expertise under a liquidation scenario, and intends to move the aforementioned strengths to China and liquidate the Japanese entity. This is probably too negative a scenario, as Renown's stock continues to surge following the share purchase announcement on May 24th.