The "Ice and Fire" of Overseas M&A in the Home Furnishing Industry: Contributing Large Revenue VS "M&A Sequelae"

Editorial Department of this journal丨Qin Jiali

After experiencing the wave of overseas mergers and acquisitions in the past few years, the overseas "operating power" of home furnishing companies has slowly diverged, some are increasing overseas projects, and some are digesting the previous merger and acquisition costs.

According to the plan, Qumei Home intends to raise 210 million yuan for the production capacity upgrade of the Norwegian factory of its Ekornes company. Ekornes was acquired by Qumei Home Furnishing at a cost of 4 billion yuan in 2018, and now Qumei Home Furnishing intends to expand its production capacity through this target company.

In fact, after the overseas M&A boom between 2018 and 2022, many home furnishing companies are now expanding their business through sub-brands acquired in the past. Among them, former M&A targets such as Qumei Home Furnishing and Dream Lily have grown into stable revenue sources for listed companies.

However, as a shortcut for home furnishing enterprises to go overseas, overseas brand mergers and acquisitions are easy to bring goodwill impairment risks and high M&A debts while improving the product matrix of enterprises. After additional issuance and fundraising, the introduction of war investment and other means, the "sequelae of overseas mergers and acquisitions" of home furnishing enterprises are gradually alleviated.

Qumei Home Furnishing upgraded the production capacity of overseas factories

The M&A targets of home furnishing enterprises continue to expand

At the end of 2023, Qumei Home Furnishing plans to raise an additional 800 million yuan to obtain the approval of the China Securities Regulatory Commission for registration, according to the plan, Qumei Home Furnishing is ready to invest 210 million yuan of the raised funds into the capacity upgrade and construction project of its Ekornes company's Norwegian factory, which is expected to replace part of the old production capacity and expand the production capacity of electric chairs, office chairs and comfortable chairs.

Ekornes was acquired by Qumei Home Furnishing and Huatai Zijin in 2018 for a 4 billion yuan tender offer, and still holds the record of the largest overseas merger and acquisition in China's furniture industry. After subsequent additional acquisitions and the introduction of strategic investment, as of mid-2023, Qumei Home Furnishing holds 90.5% of Ekornes' shares.

As an investor, this magazine called the secretary office of the board of directors of Qumei Home Furnishing and received a response: "The upgrading and construction of the Norwegian factory capacity invested in this fundraising was originally in the plan of Ekornes, and the listed company (Qumei Home) only invested money in it this time. Ekornes currently accounts for more than 60% of its revenue in listed companies, and is an important platform for Qumei Home's overseas business. ”

Five years after the acquisition of Ekornes, Qumei Home Furnishing currently intends to expand its production capacity through this target company. As a well-known Norwegian comfortable chair company, Ekornes' core product is the comfortable chair brand Stressless. According to the fundraising prospectus updated by Qumei Home Furnishing in December, the total investment in the capacity upgrade construction project of Ekornes' Norwegian factory is 245 million yuan, and the construction period is expected to be about 2 years. It is expected to produce a total of 80,000 Stressless comfortable chair products annually, with an estimated annual operating income of 606 million yuan, an after-tax internal rate of return of 22.70%, and an annual net profit margin of 12.64%, which is slightly higher than the net profit margin of Ekornes during the reporting period.

In fact, compared with the controversial lack of capacity utilization of Qumei Home's domestic production lines, the capacity utilization rate of its overseas factories is higher. According to the company's fundraising prospectus, from January to June 2021, 2022 and 2023, affected by the domestic downstream demand environment, the capacity utilization rate of finished furniture (excluding high-end solid wood furniture) in Qumei Home Furnishing was 82.66%, 69.48% and 71.91% respectively; During the same period, the capacity utilization rate of the Stressless production line in Norway was 100.73%, 99.43% and 92.26%, respectively, which was at a high level.

In addition to the expansion and upgrading of the Ekornes project by Qumei Home, Seagull Residential, Sophia and other sub-brands have recently expanded their business through the mergers and acquisitions of the past. At the 2023 brand strategy conference, the French brand Simi Cabinet, which was wholly acquired by Sophia, announced that it would cut into the high-end whole home customization track from the wardrobe.

As early as 2020, the acquisition of the Vietnamese listed company Datong Nai's Seagull Residential, in December 2023 in an investor survey, said that Datong Nai was originally mainly engaged in Vietnamese ceramic tile brands, and will increase kitchen and bathroom products in the future, and expand the market through sales through seven branches of Datong Nai. According to the performance announcement of Seagull Residential, as of mid-2023, Datong Nai's assets are 326 million yuan, and overseas assets account for 17.35% of the company's net assets.

This magazine understands that due to the needs of revenue growth, business synergy and avoidance of tariff barriers, many leading home furnishing listed companies launched overseas mergers and acquisitions from 2018 to 2022, during which Sophia acquired the French cabinet company Simi Cabinet, Opai Home Furnishing acquired the Italian furniture manufacturer FORMER, Seagull Residential acquired the Vietnamese ceramic tile listed company Datong Nai, and Markor Home Furnishing acquired the overseas high-end furniture manufacturer M.U.S.T. company, etc., and the home furnishing companies focusing on foreign trade business have purchased first-line overseas brands. However, after the "horse race", some companies' overseas revenue has risen and broadened their market territory, while some companies are facing "merger and acquisition sequelae" and are now committed to alleviating their former M&A debts.

Overseas mergers and acquisitions have been effective

In the past, the target of mergers and acquisitions became the main source of revenue

The most direct driving factor for overseas mergers and acquisitions of home furnishing listed companies is the pursuit of revenue. As an important indicator to measure the effectiveness of overseas mergers and acquisitions of home furnishing enterprises, the targets of some foreign trade home furnishing enterprises in the past have become the pillars of the company's revenue.

Take the overseas Ekornes company of Qumei Home Furnishing for the upgrading and construction of the project as an example. From 2018 to 2022, Ekornes' proportion of the main revenue of listed companies has increased from 30% to about 70%. Among the sub-brands of Ekornes, the Stressless series constitutes the main source of revenue, and Qumei Home Furnishing mentioned in the performance announcement that Stressless is a world-renowned comfortable chair brand and is known as "the most comfortable chair in the world".

In recent years, the Stressless brand has contributed more than half of the revenue to Qumei Home. According to the private placement prospectus updated by Qumei Home Furnishing in December, in 2021, 2022, and from January to June 2023, the Stressless series achieved revenue of 2.376 billion yuan, 2.553 billion yuan, and 1.084 billion yuan, accounting for 47.75%, 53.39%, and 56.55% of the revenue respectively.

It has acquired a number of overseas retail brands Dream Lily, and the target company has also contributed a stable source of revenue to it. BETWEEN 2017 AND 2019, MYLILY, WHICH FOCUSES ON OVERSEAS BUSINESS, SUCCESSIVELY ACQUIRED MATTRESSES, A SPANISH MATTRESS RETAILER, AND MOR, A FURNITURE INTEGRATED RETAILER ON THE WEST COAST OF THE UNITED STATES. As of mid-2023, Dream Lily holds 80% and 88.31% of the shares of the above two companies, respectively.

According to the annual performance announcements of Dream Lily, in 2020, 2021, 2022 and mid-2023, the operating income of MOR companies in the United States will be 1.499 billion yuan, 2.114 billion yuan, 2.23 billion yuan, and 924 million yuan respectively, accounting for 22.96%, 25.97%, 27.82%, and 25.66% of the total revenue, and contributing more than 20% of the revenue to listed companies in recent years.

The number of stores deployed by the above-mentioned target companies is also increasing. From 2019 to 2022, the number of MATRESSES stores in Spain increased from 68 to 94; The number of MOR stores increased from 0 to 38.

In addition to the pursuit of revenue, the goal of overseas mergers and acquisitions of home furnishing companies is also to supplement business shortcomings, enhance channel synergy and layout the global market. For example, although in 2019, Dream Lily began to build factories in the eastern United States to circumvent the impact of trade tariffs and cut into the main U.S. market, the reality is that at that time, Dream Lily did not have its own sales terminal on the West Coast of the United States. Subsequently, through the acquisition of the local home furnishing chain retailer MOR, Dreamlily said that it has achieved the coverage of its own brand product MLILY in the local home furnishing retail terminal.

Qumei Home Furnishing also aims to enrich its product matrix and promote the globalization of raw material procurement through mergers and acquisitions of overseas brands. According to the company's performance announcement, Qumei introduced three sub-brands of Ekornes, Stressless, IMG and Svane, forming a brand matrix with different regions and price points; The company will leverage Ekornes' global supplier network to form a comparative advantage in the cost of raw material procurement.

Wang Jianguo, co-COO of ICR of China Real Estate Research Institute, told this magazine that for home furnishing companies, directly buying mature overseas brands is a shortcut to obtain their products and channels, quickly go to sea, and become better and bigger listed companies. However, overseas M&A needs to do a good job of risk control and investment expectations in advance.

According to him: "Participating in the overseas stock market requires a certain price, such as facing fluctuations in the international economic environment, and risks and benefits coexist. Mergers and acquisitions often require huge sums of money, so home furnishing companies need to judge whether their operational capabilities have the resources to match, especially the integration capabilities between different brands. ”

Additional issuance and fundraising, introduction of war investment

Home furnishing companies alleviate the "sequelae of mergers and acquisitions"

Although overseas mergers and acquisitions are a shortcut for home furnishing companies to go overseas, premium mergers and acquisitions often bring about a surge in goodwill. Since there are only a handful of companies with sufficient liquidity, the use of leverage instruments is prone to generate a lot of M&A debt.

At present, Qumei Home is working to resolve the debt incurred during the tender offer to acquire Ekornes in 2018, when Qumei Home raised funds for the merger and acquisition, including relying on major shareholders to provide 1.5 billion yuan of financial support, using the remaining 268 million yuan of listing funds, and another 1.8 billion yuan of mortgage loans from China Merchants Bank.

From 2020 to mid-2023, the consolidated asset-liability ratios of Qumei Home Furnishing are 66.04%, 73.52%, 69.21% and 69.37% respectively, and the current debt level has not improved significantly. Qumei Home Furnishing also admitted frankly in the recent fixed increase plan that "due to the acquisition of Ekornes, a relatively large scale of liabilities has been formed, resulting in a high level of asset-liability ratio and interest expenses of the company in recent years."

In order to repay debts and reduce the company's interest expenses, Qumei Home Furnishing plans to raise an additional 800 million yuan in 2023, in addition to investing in the second phase of the Henan Qumei Home Furnishing Industry Project and the capacity upgrade and construction of Ekornes' Norwegian factory, of which 240 million yuan will be used to repay loans and replenish working capital.

The secretary of the board of directors of Qumei Home Furnishing told this magazine that the additional issuance and replenishment is an important measure to alleviate the debt of mergers and acquisitions. "30% of the recent additional fund-raising funds will be used to supplement liquidity, and there will be a surplus after the repayment of bank loans, which will be used to reduce other liabilities. Second, the interest rate of overseas bonds issued by the company is also higher than that of bank loans and domestic credit bonds, and we will replace these debts. "In the second half of 2023, the Shunyi District Government of Beijing will lead some research institutions to find experimental sites, and we have two factories in Beijing, which can be merged and used for external leasing, and a framework agreement has been signed to generate rental income in 2024." ”

In addition to raising additional funds, foreign trade home furnishing enterprises that used to stake their land also reduced the pressure on financial costs by introducing war investment. According to Qumei's 2023 interim results announcement, in order to increase the company's capital reserves and reduce interest-bearing liabilities during the period, Hillhouse Capital was introduced to hold 5.88% of the shares at the level of the Luxembourg subsidiary (Qumei Home Furnishing is a special purpose vehicle established when acquiring EkornesAS), and Hillhouse Capital indirectly became a minority shareholder of Ekornes.

Gujia Home, which once had the label of "King of M&A", "returned" the equity of Xibao Home Furnishing acquired for 424 million yuan to the original shareholders at a price of 161 million at the end of 2022. For this well-known mattress export company, the direct reason for the disposal of Gujia Home Furnishing is that the target company failed to fulfill its performance commitments.

It is worth mentioning that after several rounds of impairment, the goodwill impairment risk generated by the mergers and acquisitions of some home furnishings in the past began to be cleared. For example, in 2018, the acquisition of nearly 10 overseas brands of Gujia Home Furnishing rapidly increased from 65 million yuan in June of that year to 833 million yuan at the end of the year, of which only the acquisition of the Italian brand Natuz formed goodwill of 360 million yuan. After a goodwill impairment loss of RMB484 million in 2020, the book goodwill of Gujia Home Furnishing has declined, and as of mid-2023, the book goodwill balance formed by various investments of Gujia Home Furnishing is RMB588 million. Qumei Home's acquisition of Ekornes in 2018 generated goodwill of 1.273 billion yuan, and the book goodwill balance of this matter as of mid-2023 was 1.034 billion yuan.

Bai Wenxi, vice chairman of the China Enterprise Capital Alliance, told this magazine that overseas mergers and acquisitions of home furnishing enterprises are a process of "gains" and "losses". On the one hand, home furnishing companies can broaden their market territory, supplement their business shortcomings, and build a more complete sales network, on the other hand, high-premium mergers and acquisitions may bring goodwill impairment losses and high debt. "In the long run, the goodwill impairment risk and high debt phenomenon of home furnishing enterprises after overseas mergers and acquisitions are expected to improve. This requires companies to be cautious in mergers and acquisitions, avoid excessive premiums, and strengthen the integration of M&A targets to improve their profitability. In addition, household enterprises also need to strengthen risk management, especially the management of exchange rate risk and market fluctuation risk, to reduce the risk of goodwill impairment. ”

(The views in the article are only personal to the guests and do not represent the position of this magazine.) The individual stocks mentioned in the article are only for analysis and do not make investment advice. ）