Aug. 20, 2018

China Update

Stump Companies
Tim Stump
by
Tim Stump

Chinese tariffs? Currency manipulation? Banking bubble? We had to go to China to see for ourselves.

Our 8-day trip to southern China and Hong Kong was very eye opening. Again, we witnessed this powerful country’s strong infrastructure moves, continuing construction of massive factories and skyscrapers, and hordes of people at every turn.

Tariffs were the main topic of discussion. There is general concern that the duties will endure and long be painful to Chinese exports. Asian furniture companies are already looking for solutions, through shifts to Vietnam (where there is not much more labor available) or other parts of the world, including Mexico, or by buying US factories. Are the tariffs a long-term issue or is a negotiated settlement on the horizon?

These discussions are one of the driving forces in M&A activity, along with the abundance of capital from Private Equity (PE) funds, banks, family offices, and strategic buyers. The general economy continues to show strength, giving buyers confidence that the US economy is on solid footing for future growth. And the US corporate tax cuts are meaningful, generating more cash flow and available funds for deals.

Private Equity players have been in the news with the final saga and demise of Heritage Home. Dating back to 2013 when Furniture Brands filed Chapter 11, and was subsequently acquired by KPS, the businesses failed to find stability and revenues continued to decline, with losses mounting. Selective divestitures of Lane and Lane/Venture, and now Hickory Chair, are just the beginning, while the balance of the brands and assets will be sold or liquidated via the onerous bankruptcy process. Many of our stronger market participants have enjoyed great new business opportunities as a result of HHG’s weakness.

On a positive note, there are some terrific new PE owned platforms that are performing very well, growing both organically and via acquisition. We expect this trend to continue well into 2019 and hope to make some announcements in this sector in the coming months.

It’s a busy summer, but with long flights we have had plenty of time to read. We have listed our favorite books below:

  • The Vintage Caper by Peter Mayle (great France/wine novel)
  • Shoe Dog, by Phil Knight (a memoir by the founder of Nike)
  • World Order, by Henry Kissinger

Let us know if we can be of service to you.

Tim Stump

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