Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., agreed to pay as much as $401.8 million for a U.S. clothing business with $700 million of annual sales.

The Hong Kong-listed company will pay $101.8 million in cash and as much as $300 million over five years based on performance for the Wear Me Apparel LLC’s operations related to children’s clothing and accessories as well as men’s apparel, it said in a statement to the city’s stock exchange Monday.
Li & Fung, which makes most of its sales in the U.S., is accelerating efforts to buy makers of clothing, cosmetics, home products, accessories and shoes as retailers step up reordering to meet growing demand. The outsourcing specialist, the second- best performer on Hong Kong’s benchmark Hang Seng Index this year, has a $1 billion acquisition fund.
“It’s a children’s clothing business so they can probably generate better margins,” Renee Tai, a CIMB-GK Securities analyst who has an “neutral” rating on the stock, said in a phone interview today. “They can improve margins right away, like they did with Liz Claiborne,” whose sourcing business Li & Fung has acquired.
The operations of New York-based Wear Me that Li & Fung is purchasing had sales of $700 million last year and profit after tax and extraordinary items of $11.9 million, the statement said.
‘Very little cash’
The earnings have been “impaired by debt,” President Bruce Rockowitz said in a phone interview today. “It’s actually a strong business, it’s just the servicing of the debt was so high.”
Li & Fung isn’t assuming any of the debt and also gets about $80 million in inventory, cash and receivables, he added. “We’ll be using very little cash for this deal.”
The Wear Me sourcing business has margins that are “in line with our onshore business, which is a higher-margin business,” Rockowitz said. Li & Fung had a profit margin of 3 percent in the first half.
Wear Me holds licenses for brands including Calvin Klein, Timberland, Disney, Marvel and Nickelodeon, according to Li & Fung’s statement.
The outsourcing and trading company will be buying Wear Me’s “business of designing, sourcing, licensing, marketing and selling of children’s apparel and accessories” as well as of men’s apparel and some intellectual property rights and related assets, the statement said.
Li & Fung, also a supplier to Inditex SA’s Zara, Marks & Spencer Group Plc and Kohl’s Corp., earlier this year announced the acquisition of Liz Claiborne Inc.’s sourcing business for $83 million. Liz Claiborne’s brands include Kate Spade and Juicy Couture and its sourcing business had volume of $1.3 billion in the 2007 fiscal year.
Li & Fung, founded in China in 1906 near the end of the Qing Dynasty, is eyeing “multi-hundred-million-dollar-sales companies” in the U.S., Rockowitz said Oct. 9.
The company’s onshore business includes designing and finding suppliers for its clients. Li & Fung also receives payments for matching suppliers and buyers.
The company’s stock gained 3.7 percent to close at HK$34.65 Monday, before the deal was announced. That boosted its gain this year to 161 percent, outperforming the Hang Seng’s 54 percent.
(Source:Bloomberg)