Tycoon’s Wild  Billion Gamble on ‘China’s LVMH Accidents’

Tycoon’s Wild $3 Billion Gamble on ‘China’s LVMH Accidents’

(Bloomberg) — Six years ago, a little-known textile maker called Shandong Ruyi Group embarked on a frantic acquisition spree with the goal of becoming China’s version of luxury powerhouse LVMH.

Based in the hometown of Confucius, Chairman Qiu Yafu spent more than $3 billion amassing assets from the cobblestones of Paris to the heart of London suiting Savile Row. It bought French fashion brands Sandro and Maje, as well as UK heritage trench coat maker Aquascutum and stretch fabric maker Lycra. Those big dreams have since come to naught, and Ruyi is at the center of a messy discharge involving some of the world’s biggest financial institutions.

Ruyi now controls key businesses and is locked in disputes with creditors including Carlyle Group Inc. In June, lenders took over Wilmington, Lycra Co. based in Delaware, bought spandex producer Ruyi from the billionaire Koch brothers. The next month, liquidators for another arm of Ruyi began inviting bids for Gieves & Hawkes, the bespoke tailor that has dressed every British monarch since George III. Court decisions in the coming months could decide the fate of other assets.

Ruyi’s rise comes amid a wave of $400 billion Chinese exit deals as the government seeks to boost global champions. The authorities were encouraging traditional manufacturers to move up the value chain and help build a consumption-driven economy. Ruyi is now trying to offload assets in a difficult market, joining Chinese conglomerates such as HNA Group Co. and Anbang Insurance Group Co. are reversing their world market sprees.

“Most overseas acquisitions by Chinese companies in recent years have not been successful,” said Jeffrey Wang, co-head of the Shanghai office at investment banking firm BDA Partners. “The long liquidation of Chinese companies is continuing for so long because they cannot afford to sell those assets at a huge loss now.”

Qiu, a 64-year-old former factory worker, has been holed up in a hotel room in Hong Kong for the past few months negotiating with creditors, according to people familiar with the matter. He wants to hold on to parts of his international empire, which also includes Italian-inspired label Cerruti 1881 and British men’s retailer Kent & Curwen.

A representative from Ruyi said the companies he acquired were strategic investments and he worked hard to improve their performance, using local teams to manage the overseas operations.

“We weren’t out there making irrelevant acquisitions for the sake of winning trophy assets,” Ruyi’s representative said. “Unfortunately, the Covid-19 pandemic, along with Sino-US tensions and the tightening credit environment, have hit us hard.”

At first, Ruyi’s strategy seemed like a sure winner. Increasingly affluent Chinese shoppers were flocking to European luxury goods, so Ruyi would touch foreign brands that had neglected the Chinese market — and bring them closer to where the demand was. After buying a majority stake in French fashion group SMCP SA from KKR & Co. in 2016, Ruyi helped to create a network of more than 100 stores in the glittering malls of prosperous cities such as Shanghai and Beijing.

He listed SMCP on the Paris stock exchanges the following year, giving Ruyi the confidence to make further acquisitions. Qiu managed to quote an old saying about “sailing with the wind,” which some listeners understood as a reference to taking full advantage of the favorable trading environment.

Ruyi secured abundant funding from banks including JPMorgan Chase & Co. and Barclays Plc, making acquisitions that gave it thousands of new employees in North America and Europe and advanced facilities churning out products like Thermolite insulation. He even brought one of his favorite investment bankers in-house as he ramped up the pursuit of targets.

In 2018, Qiu publicly declared his goal to turn Ruyi into China’s LVMH, and the company began floating it as a likely buyer whenever the Western consumer business went on the block. It suddenly seemed a far cry from Ruyi’s humble history of exporting woolen fabric to developing countries.

Qiu regaled social media fans with business lessons from the ancient Chinese board game Go, such as the importance of pursuing balance and harmony over pure victory, and the way a keen rival can bring out your best performance. He feared that other Chinese manufacturers would join him in building a reputation for low quality by strengthening their own brands.

One investor who visited the company’s headquarters during that period remembers being impressed by the upmarket decor you’d expect more in a world capital than in a smaller provincial city in eastern China. Executives elaborated on their international plans. But that ambition was not enough to revive brands whose stars were already on the wane.

Ruyi Gieves & Hawkes was struggling to renew itself, which was already struggling from rising costs and a stagnant market, according to Richard Hyman, a partner at retail consultancy Thought Provoking Consulting. And turning around labels like Aquascutum that peaked “many, many years ago” took a good plan along with a lot of money and patience, he said.

“Brands under the umbrella of Shandong Ruyi have faced pressure from multiple angles in recent years, not only from the company’s financial struggles, but also from deflated demand for formal wear,” said Darcey Jupp, an analyst at a research firm. London GlobalData Plc. “Traditional formalwear brands that have failed to make their ranges responsive and casual are definitely lagging behind.”

For Ruyi, creditors soon came calling. Standard Chartered Plc filed a winding-up petition in December 2020 against Trinity Ltd., a Hong Kong-listed unit of Ruyi that owns several brands including Gieves & Hawkes.

Then last year, a trustee seized a large stake in SMCP on behalf of creditors—including Carlyle, BlackRock Inc. based in New York and Anchorage Capital Group—after the Chinese group defaulted on several convertible bonds. Since then the trustee has been suing Ruyi in court cases in England, Luxembourg, France and Singapore.

Among other things, he wants to initiate bankruptcy proceedings against the vehicle that holds Ruyi’s stake in SMCP. He appealed after the Luxembourg Commercial Court rejected the first attempt and a decision is expected by the end of this year, according to a person with knowledge of the matter.

For his part, Ruyi argued in UK court filings that Carlyle worked to put him in a position where he could gain control of SMCP shares. In May, a judge denied a request by Ruyi seeking documents he wanted to pursue the claims against Carlyle.

Representatives of Anchorage, BlackRock, Carlyle, Ruyi, SMCP and the bond trustee, Glas SAS, declined to comment on the court cases.

A number of Chinese groups have pursued rapid overseas expansion during the same period as Ruyi, hoping to replicate past successes such as the purchase of Shuanghui International Holdings Ltd. from American pork producer Smithfield Foods Inc. the promise of China’s huge consumer market was not enough to save some of the takeovers sealed during those heady days.

Creditors seized control of British restaurant chain PizzaExpress Ltd. from Chinese buyout firm Hony Capital in 2020 and are consolidating dozens of locations. Meanwhile, Suning Holdings Group Co. is trying to bring in new investors for Italian football club Inter Milan and the Chinese appliance retailer is trying to shore up its finances.

Chinese suitors were welcomed in bidding processes because they would push up valuations, according to Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. Chinese buyers’ lack of overseas experience has hindered some of those takeovers, and the number of deals out of the country is expected to drop in the medium term, she said.

“The Chinese acquirers did not consider the difficulties of post-marketing integration,” said Garcia Herrero. “The cultural clashes were beyond their expectations.”

Ruyi is now focused on deleveraging rather than expanding, the company representative said. International funds are coming in to buy their valuable assets.

The asset management arm of Macquarie Group Ltd. was acquired. earlier this year the Chinese group’s controlling stake in Cubbie Station, owner of Australia’s largest cotton farm. Various buyout firms have also studied SMCP takeovers since Ruyi’s troubles began, although some were put off by its complicated financing structure, a person with knowledge of the matter said.

“The Chinese firms wanted to grow too fast, too soon,” said Naaguesh Appadu, a research fellow at London City University’s Bayes School of Business who studies cross-border trade. “Some of them have started out very leveraged and as they continued to add more debt, it became unsustainable to continue.”

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