Comvita to take controlling stake in Chinese distributor

Comvita [NZX: CVT] plans to acquire 51 percent of its Chinese distributor in a $30 million all-stock deal that will see the owners of Shenzhen Comvita Natural Food Co lift their holding in the New Zealand manuka honey products company to more than 11 percent.

The deal is expected to be earnings accretive for Comvita in the first year, excluding one-time costs. Comvita would acquire 51 percent in what would become a joint venture by issuing 2.83 million Comvita shares at $10.60 a share. The transaction, which will see Shenzhen Comvita Natural Food Co (SCNF) poured into a new company, is subject to regulatory approvals and a sign off by the boards of the two companies by March 1 next year, with the start of operations on April 1, 2017, Comvita said in a statement.

Comvita shares rose 1 percent to $10.10 and have gained 19 percent so far this year. SCNF is 80 percent owned by Zhu Guangping, whose wife Li Wang currently owns 5.12 percent of Comvita. The remaining 20 percent is owned by Lily Sun, SCNF's general manager. The Zhu family's Comvita stake would rise to 10.07 percent after the transaction while Lily Sun would receive 566,000 Comvita shares, amounting to 1.4 percent of the stock.

Lily Sun will be appointed to the board of the new company, which will hire a new manager, said Comvita chief executive Scott Coulter. Zhu would also have a seat on the board of the joint venture.

"This JV will allow Comvita to capture an increased margin on sales into China as well as allowing us to build a pipeline of new Comvita branded products in the future. Being on the ground inside China is a key building block to our future growth strategy," Coulter said. "We have established a track record of building up exclusive distribution positions globally and then acquiring them back at the right time," he said, referring to the purchase of the UK distributor in 2005 and the Hong Kong distributor in 2007.

He doesn't see any changes to the way the business operates in China and expects a smooth transition. SCNF's sales and distribution network in China includes more than 400 Comvita branded department store kiosks and 35 branded Comvita stores in tier-one cities in China. About one-third of SCNF sales are made through e-commerce platforms such as Tmall and JD.com, and sales also come via duty-free stores. Zhu is a franchise owner in China Duty Free Group, with locations at Zhuhai on the Macau-China border and Shenzhen at the Hong Kong-China border.

"We have worked together with Comvita for over a decade and have built a very strong brand position in the Chinese market," Zhu said. "Originally I was attracted to Comvita as a number of my friends recommended their products to me, and after using them for some time I came to totally trust the brand, the company and the Comvita team".

Coulter also had high praise for Zhu, saying they had "navigated a lot of growth" over 12 years, and he "has been a great partner for that."

"This is a relationship going to another level, like going from an engagement for 12 years to married," he said. A JV made sense as "China is a complicated place, with a lot of regulatory change." SCNF "has product registration expertise, strong relationships with regulatory authorities and has built an excellent brand position for Comvita," he said.

Chinese customers "ultimately consume approximately 60 percent of our total sales, whether sold in Mainland China, or via tourists in Australasia, Hong Kong or other parts of the world," he said. "The Chinese market is moving more and more into a direct trade model and we expect the grey channels used by a number of importing companies will become increasingly difficult to navigate for many product lines" as China tightens its food safety rules.

(BusinessDesk)

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