Ten days after a major Chinese juvenile products company announced its plan to establish a North American production base, a big deal in the reverse direction was announced.
Dorel Industries Inc. of Montreal said June 16 it signed an agreement to acquire the juvenile business of Lerado Group of Hong Kong to give it a beachhead in China.
In the earlier-announced deal, Goodbaby International Holdings Ltd. of Kunshan City, Suzhou, China, revealed its intention to buy diverse child products firm Evenflo Co. Ltd. of Miamisburg, Ohio.
Dorel said it agreed to pay HK$930 million (US$120 million) for the Lerado juvenile products stake. Dorel said the business is one of the largest juvenile product manufacturers in China that designs and produces a wide range of infant and juvenile items. Lerado Group is a subsidiary of Lerado Group (Holding) Co. Ltd., publicly traded on the Hong Kong Stock Exchange.
Dorel will enter manufacturing in China with the acquisition of two Lerado plants in Zhongshan, one of which is the headquarters facility, a recently completed factory in Huang Shi and a research and development center in Taiwan. It stands to get more than 2.5 million square feet of space and more than 5,000 employees.
A Dorel spokesman said all the company's juvenile products are currently made in Asia, especially China, except car seats, which are made in Indiana. Lerado now makes about 15 percent of Dorel's juvenile products so the two companies are familiar with each other. Goodbaby has been making Dorel's strollers but Goodbaby will soon become a Dorel competitor when it completes the acquisition of Evenflo, probably by late summer.
Lerado, which is traded on the Hong Kong stock market, said in a July 17 filing that the juvenile products division being sold lost money last year and weak markets in the United States and Europe, which account for 75 percent of sales, made a quick turnaround unlikely.
"With the slower than expected economic recovery in the U.S. and Europe, coupled with the declining birth rates experienced by the developed countries, the higher operating costs in [China] and the continuous appreciation of Renminbi, the export markets of the group continue to be weak and rapid turnaround in market conditions is not expected in the near future," the company told Hong Kong regulators.
"Under these circumstances, the company decided to exit the disposed business," it said.
It said the juvenile products business lost HK$9.3 million (US$1.2 million). Based on a Plastics News calculation, that unit had sales of about HK$1.45 billion (US$187.1 million) in 2013.
Lerado said it would shift its focus on its two remaining units, making plastic toys and medical devices, and use the proceeds to pay a special dividend of HK $226.8 million (US $29.2 million) to shareholders, with the rest for expanding its medical business and working capital.
The remaining divisions will have about 270 employees, with 2013 annual sales of HK $139.9 million (US$18 million). Those two businesses lost HK$5.6 million (US$720,000) last year, Lerado said.
Acquisition of Lerado's juvenile business will give the company more control over its heavy reliance on manufacturing in Asia.
“This venture will allow us to be more flexible in an increasingly changing environment,” stated Dorel President and CEO Martin Schwartz in a news release. “It has become more important than ever to be vertically integrated and be in direct control of our supply chain.”
Dorel expects to benefit from Lerado's continuing investments in new facilities and technology, including a recently built car-seat crash test laboratory similar to those owned by Dorel in the United States and Europe.
The deal should accelerate Dorel's strategy to grow in the Asian marketplace, an area it admits it hasn't exploited aggressively.
The parties expect to finalize the deal in the fourth quarter. It likely won't be accretive to Dorel's earnings in the first year of ownership because of work needed to integrate Lerado's facilities into Dorel's existing operations. Schwartz said Dorel will continue to supply Lerado's current customers.
Dorel's juvenile category has facilities in 21 countries. Last year its sales fell 4.5 percent to US$255.3 million while operating profit fell 1.4 percent to $18.4 million. It blamed the shortfall on challenging markets in North America and Europe but said activity in Chile and Brazil were bright spots.
Dorel's other business segments are recreation/leisure and home furnishings. Overall, the company has annual sales of US$2.4 billion and employs about 6,400.