Belle fits private-equity playbook perfectly

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Private-equity investors aren’t like you or me. Should there be any doubt, take a look at footwear retailer Belle International Holdings Ltd., which despite a 21 percent share price gain this year has the dubious distinction of being the worst-performing stock on the Hang Seng Index since it joined the benchmark in 2010.

Bad Footing
Since it joined Hong Kong’s Hang Seng Index in September 2010, Belle International has performed poorly, tumbling about 65 percent.
And yet, even as investors have shunned Belle, it’s caught the eye of Chinese private equity firm CDH Investments Fund Management Co. CDH is working with the management of Belle on a potential buyout of the $5.7 billion group, people familiar with the matter said on Tuesday.
At first glance, CDH’s interest is curious. Belle, whose brands include Millie’s and Teenmix, has seen sales slow as consumers buy more goods online and as sports shoes muscle out flats and high heels. While the company, China’s biggest women’s footwear retailer, has been bulking up in the athletic department, overall revenue growth is stalling and earnings look grim. Belle warned last month that income for the year ended Feb. 28 is expected to decrease by about 15 to 25 percent.
But in another respect, CDH’s approach is long overdue. Belle is trading at a forward price-earnings multiple of just 11 times, versus 14 times for rival Stella International Holdings Ltd. The company is crying out to be streamlined, with more than 20,700 outlets that it increased in the fourth quarter by 86 on a net basis. After Seven & i Holdings Co., the Japanese owner of 7-Eleven stores, Belle has the world’s largest retail network.
To top it off, Belle is sitting on a pile of cash and has the low debt levels that would make any private equity acquirer salivate.
CDH, which used to have a stake in Belle, is no stranger to turnarounds. It purchased Smithfield Foods Inc. in 2013 in what was then the biggest acquisition of a U.S. company by a Chinese one, combined it with another unit in Hong Kong and listed the entity as WH Group Ltd., whose stock jumped 45 percent last year.
The challenge for CDH will be trimming Belle’s retail outlets while at the same time ensuring growth is strong enough in second-tier cities. There’s also the threat from online operators such as Inc. and Alibaba Group Holding Ltd., plus Belle needs to decide if its future is in shoes or the increasingly crowded sportswear market.
CDH will certainly have its work cut out but regardless, Belle seems a good fit.
— Bloomberg

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter

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