EXEC: Xtep Intl Divests K-Swiss Brand to Focus on Merrell and Saucony in China

Xtep International Holdings Limited has made a strategic divestiture of its wholly-owned subsidiary KP Global Investment Limited, which owns the K-Swiss and Palladium brands, as well as a series of financing instrument restructuring exercises aimed at optimizing its portfolio and strengthening its core business operations.

The company said in a media statement that it has entered into a definitive agreement with its controlling shareholder, Ding Shui Po, and his family for the sale and privatization of KP Global. The transaction, valued at $151 million, is based on the book value of KP Global as of March 31, 2024. Xtep said the move is designed to carve out the consistently underperforming segment from Xtep’s portfolio, allowing the company to concentrate its resources on developing its highly profitable brands – core Xtep brand, Saucony, and Merrell.

Ding Shui Po, chairman and CEO of Xtep International Holdings Limited, commented, “The decision to divest and privatize the KP Global followed an exhaustive review of our business strategy and financial objectives. After acquiring the KP Global for US$260 million in mid-2019, we faced three years of pandemic-related disruptions and an economic slowdown in China, which led to reduced consumer spending and adversely affected the KP Global’s performance. This strategic divestiture will eliminate the ongoing impact on Xtep’s profitability and cash flows attributable to the loss incurred by the KP Global. It is also designed to enhance shareholder value, coupled with a proposed special cash dividend distribution of US$151 million, pending shareholder approval at the forthcoming Extraordinary General Meeting.”

In conjunction with the divestiture, Xtep has negotiated a supportive arrangement with Hillhouse Capital. This includes the redemption of a $65 million convertible bond issued by KP Global to Hillhouse in 2021, and the issuance of a new, 6-year HK$500 million convertible bond by Xtep at an annual coupon rate of 3.5 percent with a conversion price of HK$5.5 per share to Hillhouse. Additionally, Hillhouse will retain an option to repurchase 20 percent of KP Global’s shares for US$65 million within the next five years, reflecting its confidence in the future potential of the brands under private ownership.

To streamline the financial arrangement, KP Global will issue an 8-year convertible bond valued at $154 million to Xtep. This bond corresponds to KP Global’s total accumulated losses since the acquisition in 2019 combined with the value of the capital investment and working capital as of the end of March 2024. It features an annual interest rate of 3.5 percent, which is consistent with the rate that Xtep offered to Hillhouse. Xtep is granted the right, over the next eight years, to convert this bond into a 30 percent equity stake in KP Global.

These financial maneuvers are structured to stabilize Xtep’s financial health by optimizing debt structure and strategically allocating capital towards profitable growth opportunities. The restructuring will pave the way for KP Global’s potential success as a private entity, while still allowing Xtep and its shareholders to benefit indirectly from future successes.

Step said that the special dividend, coupled with Xtep’s strategic reorientation deliver immediate financial benefits to shareholders and sets the stage for sustained profitability and growth. The restructuring will also lead to an elimination of losses incurred by KP Global at Xtep, with an expected improvement in profitability over the next two years and beyond. The business structure will be streamlined, focusing on running: the core Xtep brand targets the mass market; Saucony caters to the high-end sophisticated customers; and Merrell specializes in trail running and outdoor activities, enhancing synergy among these brands.

Besides, the strong cash flows generated by the core Xtep brand will support the future development of both Saucony and Merrell. Additionally, if KP Global achieves success and manages to go public independently, shareholders of Xtep will benefit from KP Global’s achievements.

“We are confident that these decisive actions will streamline our operations, enhance our profitability, and create a stronger, more focused Xtep. We are laying the groundwork not just for recovery but for a new phase of dynamic growth,” added Ding.

Wolverine World Wide Deal
To further develop the Saucony and Merrell brands in Mainland China, Hong Kong and Macau, on December 17, 2023, certain members of the Group entered into agreements with Wolverine World Wide, Inc. and certain of its subsidiaries, under which the parties have agreed that:

• Acquisition of interest in Saucony Asia IP Holdco and formation of a new joint venture:
  • XMS Sports Co. Limited, a wholly-owned subsidiary of the company) shall acquire 40 percent of ownership interest in Gemini Asia Saucony, LLC, a limited liability company incorporated under the laws of The State of Delaware of the United States of America, which was established for holding, licensing and managing the intellectual property rights associated with the Saucony brand in Mainland China, Hong Kong and Macau. A joint venture agreement shall be entered into in relation to the management and operation of Saucony Asia IP Holdco.
• Call options to acquire the remaining interest in Saucony Asia IP Holdco:
  • XMS Sports shall acquire the options to, in the event of global sale of the intellectual property of the Saucony brand or a change in control of Wolverine, purchase a further 35 percent or 60 percent ownership interest in Saucony Asia IP Holdco.
• Acquisition of the Wolverine Group’s interest in the 2019 joint venture entities:
  • MS (China) Sports Company Limited (previously known as Xtep Holdings Limited), a direct wholly owned subsidiary of the company, shall acquire the Wolverine Group’s interests in certain joint venture entities to carry out the sale and distribution of products under the Saucony and Merrell brands. As a result, the joint venture entities shall become wholly-owned subsidiaries of the Group and the agreements constituting the joint venture will be terminated.

Image courtesy K-Swiss