Brambles Limited has announced that it has entered into an agreement to combine the pallet and automotive pooling operations of CHEP China with Loscam (Greater China) Holdings Limited. Under the agreement, CHEP China will be sold to Loscam Greater China for US$132.2 million, with Loscam Greater China issuing shares to Brambles as consideration.
The combined entity will be 20% owned by Brambles and 80% by Loscam (Greater China) Co., Limited, which is the Greater China arm of Loscam Group, whose beneficial owners are Sinotrans Limited and two private equity firms, Trustar Capital (formerly known as CITIC Capital Partners) and FountainVest Partners.
Completion of the proposed transaction, subject only to certain regulatory approvals, is expected to occur by the end of the first quarter of the calendar year 2023.
“Brambles has given up on trying to build a pallets business in China on its own because it will soak up too much capital in the short term,” wrote Simon Evans in Australian Financial Review. “Instead, a joint deal is deemed a better way to continue its presence in China.”
That article also quoted RBC Capital Markets analyst Owen Birrell as saying the merger deal delivered Brambles a “very clean exit strategy from what had become an uncompetitive position in China.”
Key points of the proposed Greater China Loscam transaction
• The combination of Loscam Greater China and CHEP China will result in the largest pallet and automotive container pooler in Greater China, with a combined pool of over 20 million pallets and one million automotive containers and other crates, together with a network of service centers.
• With a significantly stronger position in Greater China, the combined business is expected to benefit from greater scale and customer reach, providing an 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.
• Completion of the proposed transaction is subject to regulatory approval from the relevant government authority of the People’s Republic of China in Shanghai.
• CHEP and Loscam’s respective operations in Australia, New Zealand, and all other Asian markets will remain independent.
“Today’s announcement represents an important strategic milestone for Brambles,” said Graham Chipchase, Brambles CEO, commenting on the deal.
“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.
“Importantly, 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.”
“This is an exciting and critical development for Loscam and CHEP, said Tai Ching Nam, Loscam Greater China’s Chief Executive. “While there is no impact on the independence of Loscam’s other operations, combining the scale and expertise of our respective organizations across Greater China strengthens our position for future growth in this attractive market.”
Key financial implications of the proposed transaction for Brambles
• 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 will deconsolidate the net assets of CHEP China on completion of the proposed transaction and will recognize 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 the finalization of completion adjustments and included within discontinued operations and does not impact Underlying Profit.
• Brambles’ 20% share in the combined business will be accounted for within ‘Investments’ on the balance sheet, and Brambles will recognize its share of profit or loss after tax on a single line item in the income statement within continuing operations.
• Post-completion of the proposed transaction, the combined business will put in place its own external debt financing facility, which will be used to fund its growth plans.
• The proposed transaction does not impact the FY23 outlook provided with the release of the FY22 results.