Global logistics giant Brambles
(ASX:BXB) has moved to slash its exposure to the huge Chinese economy by agreeing to sell its CHEP China business to an arm of Loscam Group to create the largest pallet and automotive container group across the country.
Brambles said on Monday that it had agreed to sell its Chinese business to Loscam (Greater China) Holdings. It will issue shares to Brambles, which will have a 20% stake in the combined entity instead of 100% of the business it is selling.
The sale has an enterprise value of $US132.2 million (around $A197 million), Brambles said in Monday’s announcement.
Loscam Group is owned by Sinotrans Ltd. and two private-equity firms, Trustar Capital – formerly known as Citic Capital Partners – and FountainVest Partners. That makes Loscam a part state owned business in China.
The deal is expected to be completed by the end of the first quarter of 2023, Brambles said.
Brambles shares rose0.3% to $11.95 on a day when the wider market was easier on growing concerns about the spread of Covid inside China and its impact on business activity and growth.
From Monday’s statement it seems Brambles has concluded it didn’t want to spend the capital bringing the Chinese operation up to scale for such a large economy.
The combined business will have a combined pool of over 20 million pallets and one million automotive containers and other crates, together with a nationwide network of service centres.
Brambles said that with a significantly stronger position in Greater China, “the combined business is expected to benefit from greater scale and customer reach, providing increased capability to serve customers, accelerate growth and enhance the value of pallet and automotive container pooling in Greater China, while creating synergy opportunities and capital efficiencies for Brambles”.
The combined business will operate under the leadership of Loscam Greater China’s Chief Executive, Tai Ching Nam, with Nancy Qian – currently the President of CHEP China – being appointed Deputy CEO. Brambles will have board representation, with critical decisions requiring the approval of both shareholders.
CHEP and Loscam’s respective operations in Australia, New Zealand and all other Asian markets will remain independent.
Brambles’ CEO Graham Chipchase said: “Today’s announcement represents an important strategic milestone for Brambles. In partnering with Loscam Greater China, we will expand our footprint, invest together to grow our network of operations and reduce duplication, building a truly national pallet pool. With approximately 1% of the 1.6 billion pallets in China pooled, there is an exceptional opportunity for growth which our jointly owned business can deliver to new and existing customers in this large and fast- growing market.
He justified the deal, saying in the statement that “the proposed transaction also facilitates near-term capital efficiency for Brambles.”
“We look forward to combining our operations with Loscam Greater China and expediting the conversion of the Chinese pallet market to pooling, as supply chains in the region automate and seek to become more efficient and sustainable.”
On other words Brambles saw the task of expanding in China as too expensive and too difficult with its current share.
Brambles said the results of CHEP China will be reclassified to discontinued operations in both the current and prior year. During the last full financial year ended 30 June 2022, CHEP China represented less than 1% of Group revenue.
Brambles said it will deconsolidate the net assets of CHEP China on completion of the proposed transaction and will recognise an equity investment in the combined business at its fair value. The proposed transaction will result in a non-cash gain on divestment.
“The gain will be determined on finalisation of completion adjustments and included within discontinued operations and does not impact Underlying Profit,” Brambles said in Monday’s statement.
