House rules

Attracted a major Chinese shopper

In 1849, Hugh Fraser and James Arthur started a small drapery called Arthur and Fraser in Glasgow, Scotland. With Fraser’s death in 1873, Fraser & Sons was then born. The company grew steadily. But after the Second World War, a number of major acquisitions transformed it into a national retail chain known as House of Fraser.

Now, 165 years after its founding, the firm could soon fall into the hands of a Chinese retailer. In late March, news surfaced that Sanpower has agreed to buy a majority stake in House of Fraser.

Sanpower, the owner of Nanjing Xinjiekou, one of China’s oldest and largest department stores, is controlled by multimillionaire entrepreneur Yuan Yafei. Yuan will pay $332 million for an 89% stake in House of Fraser, says CBN. The deal is Sanpower’s first investment in the UK retail sector. If successful, it will be the biggest offshore deal in the retail industry by a Chinese buyer.

Yuan, a former government official, founded his conglomerate in 1993. Sanpower’s empire has grown to span property, retail and technology. According to the company website, it holds assets that were valued at Rmb50 billion ($8 billion) at the end of 2012.

But to hear Shaun Rein, managing director of China Market Research Group, put it, Yuan is a “smaller tycoon” who is trying to copy Fosun, China’s largest private conglomerate. Shanghai-based Fosun has concluded a number of overseas deals, by diversifying outside of the Chinese market, Rein told the Financial Times. Sanpower has also been on something of a shopping binge. In the past six months, it has purchased the International Finance Centre (IFC) in Nanjing, Israel’s largest pension services company Natali, and the US-listed online apparel site Mecox Lane. The flurry of acquisitions has been enough to make some analysts nervous that Sanpower may be biting off more than it can chew, says Xinhua.

Yuan sounds unfazed by the criticism. “Most of the private enterprises in China like us have no shortage of desire to move upwards and grow bigger. However, what we often lack is the idea of ‘balance’. In other words, private enterprises tends to over-eat but rarely do they suffer from starvation. ‘Balance’ is a state of mind that we should always keep as private enterprises,” he told Xinhua.

The rationale behind the deal, says Yuan, is to exploit Sanpower’s existing retail distribution to help House of Fraser’s expansion in China as an affordable luxury brand.

Yuan is using Nanjing Xinjiekou, a Chinese department store, to purchase the stake in the British firm. This, he says, will also help to raise the Nanjing department store’s profile at home. Moreover, Yuan says that acquiring House of Fraser could assist him in his efforts to transform Nanjing Xinjiekou’s business model – specifically in relation to the retailer selling more of its own label goods. “House of Fraser’s own private label accounts for up to 40% of all the merchandise in the stores. But in China, almost 100% of the products are branded,” he suggested to National Business Daily.

Meanwhile, the deal puts an end a two-year period in which House of Fraser was searching for a buyer. The retailer, which has 61 stores in the UK, also considered an initial public offering on the London Stock Exchange and held talks with other potential acquirers like Galeries Lafayette of France.

Still, the acquisition is hardly a done deal. This week Sir Tom Hunter (see WiC172 for an interview with the Scottish entrepreneur) sold his 11% stake in House of Fraser to billionaire and Newcastle United owner Mike Ashley, rather than throwing in his lot with the board-approved Chinese takeover.

“Why did we sell our shares to Sports Direct? They offered certainty of cash today, and we balanced that up against what we considered was a highly conditional offer from the Chinese,” Hunter explained.

Most analysts expect that Sanpower will persevere with the deal, living with the Sports Direct owner as a minority shareholder. Besides, House of Fraser’s articles of association include “drag and tag provisions” which mean that the Chinese could eventually force Ashley to sell them his stake.

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