HONG KONG (Reuters) - The founder of Li Ning Co Ltd plans to sell a 25 percent stake in China’s best-known sportswear group to his talent management firm Viva China Holdings Ltd for $175 million, knocking Li Ning’s shares on concerns about his commitment to the group.
Viva China is controlled by former Olympic gymnast Li Ning, the founder and chairman of the company that bears his name and which is backed by U.S. private equity group TPG Capital and Singapore sovereign fund GIC.
Shares in Viva more than doubled on the news. But Li Ning, which operates some 7,300 branded sports stores across China, fell more than 6 percent as investors said the deal suggested the group’s founder was gradually giving up direct control of the business.
“We are concerned about the possibility that Chairman Li Ning’s involvement in the may decrease in the future, with TPG taking increased control,” Bank of America Merrill Lynch said in a research note.
The Li family’s stake in the listed company would be diluted to 17.64 percent from 25.23 percent, it said. TPG and GIC each own about 5 percent of Li Ning with the ability to raise that to a combined holding of about 20 percent over the next five years by converting bonds into shares.
The sportswear group, whose share price has more than halved since March, in July appointed executive vice-chairman Kim Jin-Goon, who is a managing director at TPG, to co-lead the firm with Li Ning during the search for a new CEO after the departure of Zhang Zhiyong.
Li sought to reassure investors on a phone hook-up after the deal was announced, saying his involvement in the sportswear company would not be affected by the stake sale, although analysts were not convinced.
“Investors are unhappy with the company as it suggested that founder Li Ning is reducing his involvement,” said Steve Chow, analyst at Kingsway Group Research.
Goldman Sachs maintained its “Neutral” rating on the company but flagged concerns over corporate governance.
“We believe the market may perceive this transaction as representing an increased risk of corporate governance as there may be renewed questions on how the chairman allocates his time and resources between the two companies,” Goldman said.
Rival Anta Sports Products Ltd benefited from the doubts about Li Ning, adding nearly 5 percent to HK$7.24. Li Ning also competes with Adidas and Nike.
China’s sportswear makers are grappling with a slowdown in the country’s $19 billion market, and Li Ning, which is struggling to reduce massive inventories, is restructuring to address changes in the fiercely competitive sector.
In August, Li Ning posted an 85 percent slide in first-half net profit as unsold inventories piled up. It warned full-year revenue would fall, and said it may post a loss.
Last week, Li Ning said its chief financial officer, Chong Yik Kay, had resigned, marking the latest departure from the ranks of its senior management as its grapples with a slowdown in the world’s second-largest economy.
Analysts said Viva, which had a market value before Wednesday’s share gains of about $160 million compared with Li Ning’s market value of $658 million, benefited from the injection of a potential growth asset.
Viva said it would buy 266.37 million Li Ning shares, or a 25.23 percent stake, from Victory Mind Assets Ltd and Dragon City Management (PTC) Ltd, which are controlled by Li Ning and his brother Li Chun.
Viva, which agreed to buy the shares at HK$5.10 a share, a 5.6 percent premium to the previous close, did not hold any Li Ning shares prior to the deal.
“The transaction is not expected to result in any change to the business strategies, management and day-to-day operation of the group,” Hong Kong-listed Li Ning said in a statement.
Viva said the purchase was aimed at expanding its business scope in China in the sports sector and the two companies could explore strategic development opportunities in sports advertising and sponsorship. It would settle the deal by issuing new shares after a five-for-one share consolidation.
($1 = 7.7512 Hong Kong dollars)
Editing by Anne Marie Roantree and Richard Pullin