A doyen of globalization makes its final retreat

Few companies symbolized the zenith of globalization more than Li & Fung Ltd. Few events are more emblematic of its perceived retreat than the company’s decision to go private.

Once feted as the ultimate middleman between the consumer markets of the West and the supply chains of Asia, the Hong Kong-based company enjoyed its heyday during the years after China joined the World Trade Organization in 2001, when the country’s exports boomed. Those glory days are long gone. On Friday, the founding Fung family and GLP Pte of Singapore offered HK$1.25 per share in cash to take the company private.

In immediate terms, the HK$7.22 billion ($930 million) offer is attractive, representing a 150% premium to the stock’s closing price before the bid was made public. Long-term shareholders who kept faith in the company’s plans to restructure, digitize its operations and diversify sourcing away from China are unlikely to be impressed. Li & Fung shares had fallen 98% from their 2011 high as of Friday’s close. The offer premium pares that loss to 94%.

As the world’s biggest supplier of consumer goods, Li & Fung designs, sources and transports products from Asia to retailers such as Walmart Inc. and Nike Inc. There are many factors behind its long decline, from rising factory wages in China to the “retail apocalypse” hollowing out American main streets. The U.S.-China trade war dealt another grievous blow to a business model that depended on linking factories in Asia with American retailers. The coronavirus, which shut down swathes of China’s economy and threatens to drive the world into recession, may have been the final straw.

The biggest driver of Li & Fung’s downfall, though, may be the rise of e-commerce and, specifically, of Alibaba Group Holding Ltd. Jack Ma’s internet behemoth connected Chinese producers with overseas buyers directly, finally obviating the need for a comprador-type service to negotiate the pitfalls on behalf of foreign companies. At the same time, the tightening grip of e-commerce retailers in the U.S., principally Amazon.com Inc., has undermined the bricks-and-mortars retailers such as Macy’s Inc. and Kohl’s Corp. on which Li & Fung relied.

Chief Executive Officer Spencer Fung, whose great-grandfather founded the company more than a century ago, and GLP, a logistics firm that was taken private in 2018 in a private equity-backed management buyout, will now seek a revival away from the glare of the public markets. It’s not the first time Li & Fung has gone private, having withdrawn in the 1980s before listing again in 1992, as Vinicy Chan and Daniela Wei of Bloomberg News wrote Monday.

Repeating the trick will be more difficult this time. Unlike the privatization of another storied Hong Kong business, the real estate company Wheelock & Co., this isn’t a purchase of undervalued tangible assets that can (arguably) be expected to revive with a turn in the market cycle. Li & Fung has long prided itself on its “asset light” model. As a result, the company has typically traded at high multiples of its book value — averaging 7.3 times in the decade through 2010. Even in its present depressed state, Li & Fung is being taken private at a premium to book.

Li & Fung’s value lies in intangibles such as its network of relationships with factories and buyers. What are these worth now, after the whole model has been upended? The company has pushed into the higher-margin logistics business. This, though, made up only 10% of revenue last year, insignificant beside the 77% that sourcing contributed.

The fundamental trouble for Li & Fung is that the world appears to have changed irrevocably. If the company does return to public markets one day, it’s likely to be in a radically different form.