July 31, 2014 12:00 am JST

Chinese investors continue scooping up British brands

SAM NUSSEY, Contributing writer

Cath Kidston’s Shanghai store opening: Baring Asia recently acquired a considerable share of the British brand.

LONDON -- The wave of Chinese investment in the U.K. is showing no signs of cresting. China- and Hong Kong-based private equity firms are snapping up Western brands, and Britain, with its open economy and numerous well-established companies, is seen as an attractive target. Chinese businesses looking to further stoke domestic growth are also ramping up their foreign acquisitions, and many Western investors are only too happy to sell.

     China's largest deals remain focused on resource and energy sectors, with the $6-billion purchase of Anglo-Swiss Glencore Xstrata's Peruvian copper mine by a consortium in April being a notable example. But investors are also moving into sectors that reflect changing consumption patterns, as the country's burgeoning middle class increasingly adopts Western habits. Last year, Shuanghui International Holdings (now WH Group) shelled out $4.7 billion to take over U.S. pork producer Smithfield Foods.

Benefits for both sides

The latest example of this new focus came on July 22. Cath Kidston, known for its bright polka-dot and floral-patterned goods, announced that Baring Private Equity Asia had bought a "significant" stake in the business, acquiring shares from both the current management and U.S.-based TA Associates, which had purchased 60% of the company in 2010.

     While possible bidders were rumored to include Japanese casual fashion giant Fast Retailing, parent company of Uniqlo, the deal went to Baring Asia in part to facilitate a rapid expansion in China. Cath Kidston already has four stand-alone stores in mainland China, with its flagship Shanghai store opening in November last year. It has seen good growth abroad generally, logging a 37% increase in international retail sales to 46 million pounds ($78.0 million) for the year ending March.

     The company currently has more than 30 stores in Japan and a significant number in other Asian nations, such as South Korea and Thailand, with a first store planned for the Philippines this year. In countries such as Indonesia, Malaysia and Singapore, Cath Kidston has been using a franchise model. The company has already "demonstrated its significant appeal and established a strong following in Asia," said Dar Chen, a managing director at Baring Asia, making it an attractive target for investment. Baring Asia is active in deals across the region, having recently taken a stake in struggling Japanese car electronics maker Pioneer and Chinese pork company Cofco Meat.

     After 10 years of record capital inflows in the Asia-Pacific, private equity firms in the region have seen disappointing results in the last couple of years, according to consulting group Bain & Co. Amid fierce competition, slowing growth in China and difficult conditions in a number of markets, many private equity firms have not seen the returns they had anticipated. They are being forced to sit on investments for longer than they would like, often holding only minority stakes that limit their ability to change the direction of companies. And their mounting cash reserves lead to elevated valuations when potential deals do arise. Despite this, there has been significant activity in the region, with $22 billion worth of new deals this year, says Bain.

     The Asia-Pacific has also seen more initial public offerings this year than any other region, according to consultants EY, up 64% from the same period last year. However, volatility in the markets has reduced the level of exit activity among private equity firms, discouraging new investments.

Hungry for growth

Optimism about longer-term prospects for the region remains high, but in the meantime, many firms are looking to "dormant" developed markets, such as Western Europe and North America. This trend is likely to benefit the U.K., which has received more foreign investment than anywhere except the U.S., according to the United Nations' 2014 World Investment Report.

     On July 12, it was announced that Beijing-based private equity firm Hony Capital would buy PizzaExpress for around 900 million pounds, one of the biggest deals in the European restaurant industry in the past five years. PizzaExpress was part of the Gondola Group, which was taken private by London-based equity firm Cinven seven years ago in a 1.34 billion euro ($1.80 billion) deal. In addition to its 436 sites in the U.K., PizzaExpress has 68 restaurants abroad and has made inroads in China, opening its first pizzeria in Beijing in May, following sites in Shanghai and Hong Kong.

     Hony Capital helps Chinese companies to expand internationally and was involved in the purchase of Italian equipment maker Compagnia Italiana Forme Acciaio by Chinese state-owned construction machinery manufacturer Zoomlion. With PizzaExpress, Hony Capital CEO John Zhao said, "We have the opportunity to leverage our local enterprise to accelerate its growth in the Chinese market." Hony Capital's appetite for overseas investment remains unabated, and it is widely rumored to be interested in purchasing British food manufacturer United Biscuits Holdings, which has previously been targeted by Bright Food Group.

     In 2012, Bright Food bought a majority stake in one of Britain's most popular cereals, Weetabix, and is now said to be considering floating the company. Cereal, valued for its convenience and purported health benefits, is becoming increasingly popular in China both as breakfast and as a snack, with consumption aided by the rise of milk as a regular part of Chinese diets. Bright Food is currently selling Weetabix across the Shanghai region.

     China has become highly profitable for many Western food brands. U.S.-based Yum Brands has more than 6,300 restaurants in China, including 1,100 Pizza Hut outlets, and plans to open at least 700 more this year. KFC, the largest fast-food chain in China, is also under the Yum umbrella, as are local chains, such as hot-pot restaurant Little Sheep. Over half of Yum's revenue comes from sales in China.

     In a country regularly gripped by food scandals -- news in recent years includes companies caught dyeing their vegetables or adding pesticide to steamed buns -- a key element of Western foods' popularity is its perceived safety. However, despite ingredients such as cheese often being imported, Western brands are not immune to controversy. Yum and other brands are currently embroiled in a contaminated meat scandal that has also spread to Japan.

Buying the store

The retail sector is also a target for acquisitions, with Nanjing-based conglomerate Sanpower Group announcing in April it would buy 89% of the House of Fraser department store for around 480 million pounds. Founded in Glasgow, Scotland, in 1849, House of Fraser is currently limited to 60 stores in the U.K.,Ireland and Abu Dhabi. Despite this, Sanpower Chairman Yuan Yafei emphasized House of Fraser's "strong and iconic heritage" and said he plans to expand rapidly in China once the deal is finalized later this summer.

     The most expensive overseas acquisition in the retail sector by a Chinese company, House of Fraser will be competing in a market that has seen an explosion of retail space in recent years, along with new challenges, such as the rise of online shopping. Sanpower has extensive retail experience as the parent company of the Nanjing Xinjiekou department store and computer retailer Hisap, which the company says has 500 outlets across the country.

     The Sanpower deal is unusual in that it was made through an onshore company. Most Chinese companies carry out such deals using offshore units, both for tax reasons and because it entails fewer approval requirements from the central government.