When fashion company Bagir Group Ltd. (AIM: BAGR) published a profit warning early this week, it announced that it was in advanced negotiations with a leading international textile manufacturer for strategic cooperation that would include an investment in Bagir. The company announced today that Chinese company Shandong Ruyi would acquire a 51% controlling interest in it for a $17 million investment. The share price for the deal was £0.035, the same price at which businessperson Zvi Barenboim invested in the company last year and at which Noked Capital and The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) acquired shares in Bagir early this year. The price is 153% higher than the Bagir's current share price on the AIM stock exchange in London, which reflects a $6 million market cap.
The Chinese company's investment will dilute the stakes of the existing shareholders in Bagir. For example, Barenboim's holding will fall to 13%. The deal does not include the sale of shares by the existing shareholders; all the money from Shandong Ruyi will go directly to Bagir, which aims to continue development of its plant in Ethiopia. Bagir acquired the plant several months ago with an investment totaling several million dollars. In retrospect, this acquisition paved the way for Shandong Ruyi's current investment.
The reason is that the cost of textile production in China has risen substantially, and the industry is labor intensive. It appears that Shandon Ruyi is looking for cheaper production sites, and Ethiopia is one of them. Building a plant takes a relatively long time, so acquiring control of Bagir will give the Chinese company access to an existing production plant and cheap labor. Furthermore, the Ethiopian plant also has the advantage of exports to the US and Europe free of customs duties, in contrast to plants in China, so Bagir also constitutes a channel for the Chinese company to enter the US market.
Shandong Ruyi, which was founded in 1972, is considered one of the largest textile firms in China, with activity all along the production chain. Among other things, it owns cotton fields and a sheep farm used for raw materials. The company manufactures and designs its own clothing, and also markets it. A year ago, it acquired French fashion company SMCP, which has a number of known brands. Shandong Ruyi operates in a number of countries, including Japan, India, Australia, and New Zealand. It has subsidiaries, some of which are public companies, in Japan and China.
Bagir, founded in 1961, designs, manufactures, and markets tailored clothing. The company held its IPO in London in 2014, led by Barenboim and FIMI Opportunity Funds, at a company value of $66 million, after money and a share price of £0.56. The company shortly afterwards encountered a severe crisis, with its share losing most of its value. The company announced that its biggest customer at the time, the UK Marks and Spencer chain, was cutting the volume of its orders , and also issued a profit warning.
In last 2016, Barenboim regained control of Bagir in a combined measures in which the company raised $10.5 million in a share offering, and reached an arrangement for its $21 million debt to Bank Leumi (TASE: LUMI) and Israel Discount Bank (TASE: DSCT). The arrangement included writing off a substantial proportion of Bagir's debt, with an option for a future upside through obtaining shares in the company (Bank Leumi current owns 4.1% of Bagir's shares). As part of this measure, Barenboim himself bought 21.5% of Bagir's shares through Barinboim Properties, in addition to an investment by Milton Asset Management, which acquired 18% of Bagir. Two months later, Bagir raised $1.6 million more from Noked, controlled by Roy Vermus, and from Phoenix.
Bagir this week reported a slowdown in orders and a postponement of several orders from the second half of 2017 to the first half of 2018, and said it would fail to meet its EBITDA targets for 2017 as a result. The company predicted that its challenges would stay the same in 2018, but said that the cutbacks it was making would enable it to stay profitable. When the company issued its profit warning, Bagir CEO Eran Itzhak said, "If a strategic partnership is created with the textile manufacturer, we will attain our targets much more quickly."
Published by Globes [online], Israel Business News - www.globes-online.com - on November 23, 2017
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