July 31, 2014 12:00 am JST

Can tie-up with Japan's Itochu restore shine to Thai giant CP?

YUKAKO ONO, Nikkei staff writer

Itochu President Masahiro Okafuji, left, seals a tie-up deal with Charoen Pokphand Chairman Dhanin Chearavanont on July 24 in Hong Kong. The two are looking to grow their business in Asia and beyond.

BANGKOK -- With operations ranging from agribusiness to convenience stores, telecommunications to cars, Charoen Pokphand Group is the largest family-owned conglomerate in Thailand and one of its most influential businesses.

     In recent years, however, the Thai giant has stumbled, tripped up by sluggish growth in its domestic food business and allegations that it buys friendly media coverage and profits from forced labor. Now CP Group is looking to dispel the cloud hanging over it through a cross-shareholding deal with Japanese trading house Itochu that it hopes will give it scope to expand outside its familiar turf in Southeast Asia.

     At a signing ceremony in Hong Kong on July 24, Dhanin Chearavanont, the group's chairman and chief executive, said CP was proud to have formed a strategic alliance with Itochu, which will make it the largest shareholder in the Japanese concern after it buys a 4.92% stake in the trading company for 102 billion yen ($1 billion). Itochu will reciprocate, buying a 25% stake in a subsidiary of Charoen Pokphand Foods, the core agribusiness arm of CP, for 6.62 billion Hong Kong dollars ($854 million).

     Itochu said in a filing with the Tokyo Stock Exchange the same day that the alliance will enable the two companies to work together to develop the Asian market, particularly Thailand, Vietnam and China. CP's statement released July 25 said the partnership aimed to develop investment and trade opportunities worldwide.

     CP already has significant overseas operations, generating about half its $41 billion in sales last year outside Thailand. It has investments in Vietnam, Cambodia and Myanmar, among other Asian countries, mainly in the feed and livestock sectors.

Middle Kingdom move

The group's largest investments are in China, where it has spent $8 billion to $9 billion and employs 80,000 workers, making it one of the country's most successful foreign players. The Chearavanont family traces its roots to southern China, and its entry into the country in 1979 was said to have been endorsed by then-paramount leader Deng Xiaoping, who at the time was busy reforming China's economy.

     Recently, CP formed a joint venture with Shanghai Automotive Industry to make MG cars in Thailand. CP's feed business in China, initiated by C.P. Pokphand -- the CP Foods unit incorporated in Bermuda and listed in Hong Kong that Itochu is buying a piece of -- is the No. 2 player in the country. This made the Thai company attractive to Itochu, which is trying to build up its business outside the resource sector.

     Phatra Securities analyst Charti Phrawphraikul sees CP's operations in Asia as relatively small compared with those back home. "The company may be looking to expand more into the downstream businesses with Itochu, such as packaged food and retail," Charti said in a telephone interview. Another Bangkok-based analyst, who requested anonymity, said value-added businesses could yield higher profit margins. She also said that by teaming up with Itochu, CP's upstream businesses could benefit by gaining more buying power and access to distribution channels.

Grow out of trouble

Itochu's networks around the world could be a springboard for the Thai conglomerate to expand outside Southeast Asia to Japan, Europe and the U.S. CP Foods, the group's key subsidiary, and its most internationally active, has very few businesses in these places yet. Sarasin Viraphol, executive vice president of CP, told the Nikkei Asian Review earlier in July the company wants to expand into new markets by partnering with others. "We will add value to an existing company, rather than starting from scratch. It is not possible" to do so, he said.

     The deal will also help Bangkok-listed CP Foods improve its financial position. The company's business has slumped in the past several years, due to a glut in the poultry market in 2012 and an outbreak of disease in its shrimp farming business in Southeast Asia last year. The company's net profit in 2013 was around half what it was in 2011, while its debts nearly tripled. The sale of the C.P. Pokphand stake will bring in much-needed cash. It will use the proceeds to pay off debt, the parent company said in a statement. That helped shares of CP Foods touch a four-month high on the afternoon of July 24.

     But the gain was short-lived. The next day, the shares fell 3.5%. Given that the deal is essentially a share swap between CP and Itochu, the Thai group's finances will not change much, analysts say. CP has been aggressively seeking mergers and acquisitions. Last year, it bought a 15.6% stake in Chinese insurer Ping An Insurance. That deal was followed by the takeover of cash-and-carry chain Siam Makro by CP All, the convenience store arm that operates 7,600 7-Eleven outlets in Thailand.

     There are other headwinds that could be holding back investors buying into CP foods. The company has been dogged by controversy since the U.K.'s Guardian newspaper reported it had been buying fish meal for its shrimp farming operations from boats crewed by forced laborers.

     In addition, a local media organization hinted that CP may have been bribing reporters for favorable coverage. The allegations led the Bangkok Post, one of Thailand's two major English-language newspapers, to announce on its front page that it would not carry news from CP Foods to "ensure transparency." The Itochu deal, which came just a week later, was not reported by the paper.

Agriculture and beyond

Charoen Pokphand Group was founded in Bangkok in 1921 by the Chia brothers, immigrants from China. Over the years, their modest seed shop blossomed into one of Thailand's most powerful conglomerates.

     The group's agribusiness remains its core, with unit Charoen Pokphand Foods posting annual income from sales of 389.2 billion baht ($12.1 billion) in 2013. Still, other operations are major contributors, too. CP All, which runs 7-Eleven convenience stores in Thailand, logged total revenue of 284.6 billion baht. True, the country's No. 3 wireless provider, racked up 96.2 billion baht and recently agreed to take an investment from China Mobile.

     All told, the group's sales last year came to around $41 billion. Its assets, revealed in a statement on the Itochu deal as a simple aggregate of major subsidiaries' nonconsolidated figures, stood at $32.713 billion. That is roughly double the total assets of Singaporean beverage conglomerate Fraser and Neave, and one-quarter those of global food giant Nestle.

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