Japanese textile retailer Itochu Corp is acquiring a 28 percent stake in Shanshan Co Ltd for around 758 million yuan from the Shanghai-listed company's parent Shanshan Group.
Itochu Corp will hold 25 percent of the stake in the textile firm and Itochu (China) Holding Co Ltd, the balance 3 percent.
Shanshan chairman Zheng Yonggang said the stake buy would help the Ningbo-based textile manufacturer change into an integrated business conglomerate. The company would also benefit from Itochu's resource advantages and management skills.
The textile industry in China has slowed since last year as a result of the yuan appreciation in the first half of the year.
Shanshan posted sales of 11.8 billion yuan in 2008, which, according to Zheng was difficult to surpass. "It is possible that the turnover of Shanshan (as a textile manufacturer) will remain the same for a decade, or even longer," a Xinhua report quoted him as saying.
Zheng said although he had started the enterprise himself, it was time to invite an outside partner to solve problems as the company intends to grow into a true international enterprise.
"Itochu is superior to Shanshan in terms of distribution network and technology, and its over 150 years of experience is not something we can buy with money," Zheng said. He said he was more interested in the soft power that Itochu can bring, rather than the money it puts in.
According to the agreement, the Japanese retailer will depute four employees to join Shanshan's management team and participate in its daily operations.
"Itochu has rich experiences in the textile retail business, and these experiences would be very valuable for Shanan as it transforms from manufacturing to retailing and logistics," said Wang Rong, analyst, United Securities.
"For Itochu, Shanshan is a strong domestic brand and that will be a valuable asset for the Japanese textile retailer to build its portfolio here," she said.
Zheng added that the cooperation between the two sides is not limited to textiles and garments.
Shanshan has also expanded beyond textiles, according to Wang. She noted that the company is now China's biggest lithium battery producer. In 2007, 61.5 percent of its revenues were from garments and 32.2 percent from battery materials.
The agreement also requires that Shanshan would be able to buy back the shares at the price Itochu paid for them if the Japanese company fails to reach the set performance goals in three years. Likewise, Itochu can transfer the shares if it believes it has problems with the Chinese company.
Itochu entered China in 1993 and has invested in over 300 projects. Last year, it started cooperation with several Chinese food companies including State-owned COFCO and also had a $710 million investment in Ting Hsin, a major food processing company.
But Wang from United Securities cautioned that this move could be risky for Shanshan. "With Itochu's strong experiences in brand operation, it is possible that it would finally absorb the Shanshan brand, and it may finally disappear," she said.
Shanshan shares closed at 12.16 yuan per share on the Shanghai Stock Exchange yesterday, down 2.72 percent. Its share price has stayed at higher than 10 yuan a share in the last two months after reaching a record low of 3.91 yuan in December 2008.