Footwear company HARSON acquires "Fruit Chain" assets across borders, plan changes: stock issuance replaced by "cash payment"

Cross-border acquisitions are not easy for listed companies.

On September 14th, HARSON (603958.SH) changed its previously prepared acquisition project from a major asset restructuring to a cash acquisition.

Back in January, HARSON planned to acquire 90% equity of Jiangsu Langxun Industrial Intelligent Equipment Co., Ltd. ("Jiangsu Langxun"), 45% equity of Suzhou Langkes Precision Hardware Co., Ltd. ("Suzhou Langkes"), and 23.08% stake of Suzhou Yeyu Enterprise Management Partnership Enterprise Co., Ltd. ("Suzhou Yeyu") by issuing shares, aiming to transition from the shoe industry to the consumer electronics industry.

However, HARSON directly adjusted the transaction to a cash purchase of assets' equity for 358 million yuan, reducing the percentage of equity acquisition.

The reason for this change in the transaction scheme, according to HARSON, is to expedite the transaction process.

The previous major asset restructuring had been delayed, possibly due to significant differences between HARSON's main shoe business and the target consumer electronics industry.

This may provide more insights for others, as although the "New Nine Policies" encourage restructuring and acquisitions, a cautious attitude is still held towards cross-industry mergers and acquisitions. Challenges still exist in completing merger and restructuring through share issuance.

The successful completion of this acquisition is currently under scrutiny.

Changed to "Self-financing"

As early as January this year, HARSON planned to purchase 90% equity of Jiangsu Langxun, 45% equity of Suzhou Langkes, and 23.08% stake of Suzhou Yeyu through issuing shares and cash payment.

This constituted a major asset restructuring.

These three acquired companies are mainly engaged in the sales of precision metal structural components and related equipment, which are clearly not in the same industry as HARSON's shoe business.

This cross-border acquisition carries the expectation of HARSON's transformation.

"The target companies are mainly engaged in the research, development, production, and sales of precision metal structural components and related equipment, with good overall profitability. By acquiring high-quality assets, the listed company can enter the vast consumer electronics market, achieve diversified business layout, and further expand into emerging businesses," HARSON pointed out.

Ideals are lofty, reality is stark.

From planning in January to the present, HARSON's acquisition has been ongoing for nearly 9 months but has yet to materialize.

Until September 14th, HARSON voluntarily terminated this major asset restructuring and turned to cash acquisition.

Moreover, HARSON also reduced the percentage of equity acquisition.

In this plan, HARSON intends to spend 358 million yuan in cash to acquire 55.2% equity of Jiangsu Langxun and 45% equity of Suzhou Langkes.

As this cash acquisition does not constitute a major asset restructuring, HARSON's transaction scheme no longer requires approval from regulatory authorities such as the stock exchange, which may enhance transaction efficiency.

HARSON believes that cash payment will help expedite the transaction process, improve transaction efficiency, and reduce transaction costs.

The previous share acquisition plan had been pending, partly due to regulatory caution towards cross-industry mergers and acquisitions.

Given the significant difference in core businesses, the Shanghai Stock Exchange had raised questions to HARSON on how to manage post-investment "Combining the company's existing experience, personnel, and technological reserves, as well as the aforementioned integration measures and plans, explain whether the company can effectively control the operations and finances of the target company in the case of significant differences in core business," stated by the Shanghai Stock Exchange.

The proposal put forward by Harson involves the existing business continuing to be managed by the target company's current management team, with Harson only implementing control measures for major issues.

Xin Feng (ID: TradeWind01) inquired with Harson about the reasons for changing the acquisition plan possibly being related to policies, but as of the time of drafting, no response has been received.

From a practical perspective, cross-industry mergers and acquisitions are indeed challenging.

Xin Feng (ID: TradeWind01) used the announcement date of the merger plan from September 1, 2023, to September 14 of this year as the condition for statistical data from Wind, and found that out of 28 listed companies that announced merger plans, only three companies, Shuang Cheng Pharmaceutical (002693.SZ), Bao Ta Industry (000595.SZ), and Anfu Technology (603031.SH), engaged in cross-industry mergers.

Currently, the mergers of Shuang Cheng Pharmaceutical and Bao Ta Industry have not yet received regulatory approval.

Bao Ta Industry's operation has a certain uniqueness, using the assets and liabilities related to the main bearing business as the disposed assets to exchange for 100% equity of Ningxia Electric Investment New Energy Co., Ltd., achieving transformation.

Shuang Cheng Pharmaceutical plans to acquire a semiconductor company controlled by the actual controller through issuing shares and paying cash, thereby transitioning from the pharmaceutical to the semiconductor industry.

Cross-border mergers and acquisitions have always been controversial.

A banker in Beijing pointed out that Harson's "self-financed" cross-border merger and acquisition may also provide reference value for more listed companies.

Although the "New Nine Articles" encourage restructuring and mergers, they still emphasize the need to further reduce the value of "shell" resources. Strengthening regulatory oversight of mergers and acquisitions, enhancing relevance to the main business, and strictly controlling the quality of asset injections.

On September 13, the Shanghai Stock Exchange released the "Listed Company Mergers and Acquisitions Rules, Policies, and Case Studies Handbook," which emphasizes industrial mergers as the main theme, supporting market-oriented absorption and mergers between listed companies under different controls in the same industry or upstream and downstream.

Against this backdrop, listed companies seeking to engage in cross-border mergers and acquisitions through issuing shares will inevitably face strict supervision.

With Harson actively changing the acquisition plan to a cash acquisition, the market is closely watching whether Shuang Cheng Pharmaceutical will also change its transaction plan, among other developments.

Pointing to the Fruit Chain Business

Harson has multiple shoe brands under its umbrella, such as Harson and Cardina, but due to factors like intense market competition, its performance has been consistently in a loss-making state.

In 2022 and 2023, the revenue was 766 million yuan and 812 million yuan respectively, with net losses attributable to the parent company of 156 million yuan and 5 million yuan respectively during the same period.

In this context, Harson aims to transform through cross-border mergers and acquisitions.

If Jiangsu Langxun and Suzhou Langkes are merged, it can indeed boost the performance level.

Jiangsu Langxun mainly sells non-standard automated equipment for assembling iPads, Mac computers, etc., to anonymous Company A, Luxshare Precision (002475.SZ), GoerTek (2018.HK), and other fruit chain manufacturers Affected by the decrease in terminal shipments and the gradual shift of Guolian's business overseas, Harson's revenue from Guolian has dropped from 90% in 2022 to 40% in 2023.

However, due to the addition of sales revenue from automotive, civilian nuclear technology, and other automated equipment, Jiangsu Langxun remains profitable.

In 2023, Jiangsu Langxun's revenue and net profit were 48 million RMB and 15 million RMB, respectively.

Suzhou Langkes mainly provides entrusted processing services for structural components such as iPhone phone frames for Guolian manufacturers.

In 2023, Suzhou Langkes' revenue and net profit were 237 million RMB and 47 million RMB, respectively.

However, the sustainability of the performance growth of Jiangsu Langxun and Suzhou Langkes is still to be observed, given the impact of weakening terminal market demand and the lessons learned from OFILM (002456.SZ) and GoerTek (002241.SZ) being successively removed from Guolian.

This time, Jiangsu Langxun and Suzhou Langkes have also made performance commitments. For example, Suzhou Langkes promises that the net profit attributable to the parent company from 2024 to 2026 will not be less than 51 million RMB, 57 million RMB, and 63 million RMB, respectively.

Harson will also pay 136 million RMB from the total transaction price in installments based on the actual performance of the commitments.

If Jiangsu Langxun and Suzhou Langkes fail to meet the performance commitments, Harson has the right to deduct the compensation directly from the 136 million RMB.

With multiple safeguards in place, the market is eagerly awaiting whether Harson's acquisition this time will be successful