Ten Huge Global Brands The Chinese May Buy

“We will encourage the best firms to acquire or build up overseas operations and to license or acquire famous global brands in order to obtain international recognition and improve the image and competitiveness of Chinese products.”–Commerce Minister Chen Deming March 7, Fourth Session of the 11th National People’s Congress in Beijing 

“China’s demand for high-end products is currently the second largest in the world, and it will surpass Japan’s in four years”–Xinhua News.

“Consumption of high-end products in China rose 23 percent in 2010. The number of Chinese people shopping for luxury goods overseas increased 30 percent.”–Commerce Minister Chen Deming

It is rare that the Chinese government makes it intentions for overseas business expansion as clear as it did when the head of its Commerce Department said the central government would support the acquisition of major brands by local companies. China has built a large public investor market for its own corporations though IPOs of some of the nation’s huge firms like China Mobile and oil giant CNOOC. One of the reasons China has allowed these public listings is probably to encourage them to use their stocks as currency for M&A activity. Beyond that the People’s Republic has stockpile of capital to fund expansion of its largest companies. China has over $2 trillion in foreign currencies. The nation’s GDP continues to grow at 8%China has had almost no success it expanding it own brands so that they can be used to market products and services overseas. “The Brandz Top 100 Most Valuable Brands 2010” study lists a number with parent companies based in China. China Mobile is ranked as the 8th most valuable brand worldwide at $52.6 billion. The company has 300 million wireless customers, but is unknown by consumers outside China. The People’s Republic is not home to any brands with the global recognition of ones like Coke, Google. Marlboro, Apple, McDonald’s, HP, or Wal-Mart. All of these brands sell their products or services in China, and for some the People’s Republic is the critical market for future growth.

China’s plan is simple. It is easier to buy a brand which has a value based on years or decades of exposure than to build one, which has risk and could take a very long period of time. It is tempting to create a list of corporations with valuable brands which might be bought with Chinese government support by choosing companies like IBM, Disney, Colgate, or Intel. But, these corporations operate with large profits, have strong balance sheets, significant global market shares, and large market capitalizations. There is no reason for the boards of these firms to consider selling them. There is no reason for the US government to entertain their sales.

24/7 Wall St. identified ten companies or brands that might be sold. These are, for the most part, firms with strong brands but long records of poor financial performance. The sales, earnings, and share prices of several are still in steep decline. Other companies on the list are private and their equity and debt holders might be tempted to sell them at large premiums as a way to “exit” their investments with a significant return.

The public companies on the 24/7 Wall St. list of The Huge Global Brands China May Buy come from reviews of sales, the portions of sales which are outside the US, stock performance compared to the S&P 500 over the last five years, and data from Brandz and Interbrand about the value of each company’s brand. If a brand value for one of the companies on the list was not available, we looked at a comparable one. Our assumption is that Chinese firms with the proper financial resources could increase the sales and value of these brands by several means. The most immediate way to do this is to increase their presences in the world’s most populous nation. The final criteria to be selected for list is that the companies cannot be in “strategic” businesses like defence equipment or enterprise software. American regulators and politicians have already shown that they will not approve transactions in these sectors.

Read on for The 24/7 Wall St. Huge Global Brands China May Buy

1. Harley Davidson – HOG
> Value of Brand: $3.281 Billion (Interbrand Valuation)
> Market Cap: $9.56 Billion
> Stock 5 Year Performance: 18% below S&P
> 5 Year High: $74.93
> 2010 Revenue: $4.859 Billion
> Sales Outside of US: 35%Harley has a brand value which is nearly as large as its revenue and many times its earnings. The company enjoyed a renaissance a decade ago under new management which improved the notoriously poor quality of its motorcycles. Harley’s turnaround was undermined by high gas prices in 2008 and global competition from much better financed brands like Honda. The HOG brand is known throughout Asia and Europe, but a complete renaissance of the company would involve a large investment in marketing and an accompanying increase in relatively inexpensive manufacturing. Buyers in China would include car manufacturers Geely and Shanghai Automotive Industry Corporation. Geely already has a motorcycle division
2. Xerox – XRX

> Value of Brand: $6.109 Billion (Interbrand)
> Market Cap: $14.43 Billion
> Stock 5 Year Performance: 30% Below S&P
> 5 Year High: $19.90
> 2010 Revenue: $21.633 Billion
> Sales Outside of US: 36%

Xerox management has staged an impressive recovery over the last decade, but its remains a second tier presence in the printer, copier, business services, and IT sourcing business. These businesses are still dominated by companies which include tech giant Hewlett-Packard and several Asia-based companies. The Xerox brand has existed since 1959. PC and server giant Lenovo would be a logical buyer. It purchased the IBM PC operations in 2004.

3. Nokia – NOK
> Value of Brand: $29.495 Billion (Interbrand)
> Market Cap: $31.14 Billion
> Stock 5 Year Performance: 59% Below S&P
> 5 Year High: $39.71
> 2010 Revenue: $58.459 Billion
> Sales Outside of US: 97%

Nokia is the largest company on this list and has over one-third of all handset sales in the world. It has faltered badly in the smartphone market in which its prospects have been overwhelmed by Apple, Research-In-Motion, and a number of companies.which have adopted the stunningly successful Google Android operating system. Nokia recently closed a business partnership with Microsoft to use the mobile OS of the world’s largest software company in its smartphones. The first products based on this partnership are over a year away from release. Opposition from the government of Finland where Nokia is based could kill a deal to buy Nokia, and the cost of a deal, which would be above $50 billion would make this a challenge. Chinese telecom equipment and handset company ZTE would be the logical buyer

4. Avon – AVP
> Value of Brand: $7.293 Billion (Brandz)
> Market Cap: $11.71 Billion
> Stock 5 Year Performance: 8% Below S&P
> 5 Year High: $44.35
> 2010 Revenue: $10.862.8 Billion
> Sales Outside of US: 84%

Avon’s sales were down 45% in China in the fourth quarter, primarily as it  moved away from a hybrid model to one which focuses on direct selling. Avon’s global revenue is flat and the company’s margins are under pressure. Avon’s potential prospects in China are still considerable. Only $55 million of the company’s $3.2 billion fourth quarter revenue originate in the People’s Republic. But, the brand is well known there. Avon may be struggling, but the brand is over 80 years old. Apparel and retail clothing supplier Youngor is the most likely buyer of Avon

5. eBay – EBAY
> Value of Brand: $9.328 Billion (Brandz)
> Market Cap: $40.63 Billion
> Stock 5 Year Performance: 20% Below S&P
> 5 Year High: $39.90
> 2010 Revenue: $9.156 Billion
> Sales Outside of US: 54%

A buyer of eBay might not have to pay much more than one times revenues for the company, but a sales of the entire company is unlikely. eBay’s value is probably more in the sum of its parts. It global payment system, PayPal, does well. It online auction business does not. eBay is by far the better know of the two brands. The eBay auction operation has 90 million users. But, it is growing at only 4% based on fourth quarter 2010 numbers. Paypal’s growth rate is 24%. PayPal would want to keep its relationship with the eBay auction business intact if that operation was sold. The relationship accounts for an important part of PayPal’s income. There are several Chinese companies which could buy the eBay auction business. The most likely is Alibaba, which is partially owned by Yahoo!. China search engine company Baidu might also be a buyer.

6. Kodak – EK
> Value of Brand: N/A
> Market Cap: $864.46 Million
> Stock 5 Year Performance: 90% Below S&P
> 5 Year High: $29.31
> 2010 Revenue: $7.187 Billion
> Sales Outside of US: 57%

Kodak became a registered trademark in 1888 which makes it one of the oldest major brands in the United States. Its parent, Eastman Kodak, a long-time maker of cameras, film, and printing machines was late in its transition to the digital age. The company’s market capitalization is below $1 billion. Revenue was $13.4 billion in 2006 compared to $7.2 billion last year.  Kodak still has a presence in the digital camera and digital printing business. It also has a relatively healthy scanner operation. The company suffered a substantial setback when its patent action against Apple and RIM was ruled invalid by the ITC. Kodak’s single most value able asset is its brand which is still recognized around the world. Levovo is the most likely buyer of Kodak.

Also Read: China Passes U.S. as World’s Largest Manufacturer

7. Footlocker – FL
> Value of Brand: N/A
> Market Cap: $3.11 Billion
> Stock 5 Year Performance: 16% Below S&P
> 5 Year High: $26.53
> 2010 Revenue: $4.854 Billion
> Sales Outside of US: 29%

Footlocker operates 3,426 stores in 21 countries and has little presence in Asia. The shoe retailer barely made a profit in the fourth quarter of 2010– only $57 million. Footlocker’s major problem is that it has to compete with big box retailers like Wal-Mart and Target both of which have tremendous website traffic and strong balance sheets. Footlocker’s big advantage is that it has distribution relationships with Nike, Adidas, Under Armour, and Reebok–the strongest brands in the athletic wear industry. If Footlocker had a large presence in China, it could sharply increase sales. The most logical buyer in the People’s Republic is retailer Dashang Group.

8. Chrysler
> Value of Brand: N/A (Comparable: Ford $7.195 Billion (Interbrand)
> Market Cap: N/A
> Stock 5 Year Performance: N/A
> 5 Year High: N/A
> 2010 Revenue: $41.9 Billion
> Sales Outside of US: N/A

Chrysler may emerge from Chapter 11 this year, but it is still by far the weakest of America’s three largest car companies and has only about 10% of its home market. Its sales overseas are very modest. Chrysler will find it nearly impossible to compete globally against Ford, GM, Toyota, VW, and Honda. It has no upscale brand to challenge BMW, Mercedes, Infiniti, Lexus, or Cadillac. Chrysler’s relationship with it managing shareholder Fiat has born little fruit. Chrysler would certainly have a chance to compete in the world’s largest car market–China–if it had an owner in the People’s Republic. None of the China-based car companies have a global brand like Chysler’s which dates back to the 1920s. It is difficult to value Chrysler’s brand. Interbrand values Ford ad over $7 billion. Chrysler might be worth half of that. The firm still loses money, but had sales of $40 billion last year. Chrysler needs an owner with deep pockets and access to a large manufacturing base which is relatively inexpensive. Geely and SAIC would both be potential buyers.

9. Subway
> Value of Brand: $12.032 Billion (Brandz)
> Market Cap:
> Stock 5 Year Performance:
> 5 Year High:
> 2010 Revenue: $15.2 Billion
> Sales Outside of US: 31%

Subway is privately owned and has 34,264 locations in 96 counties. Its presence in China, where it has 199 stores, it small compared to McDonald’s and Yum Brand’s operations which include Kentucky Fried Chicken and Pizza Hut. Subway is owned by Doctor’s Brands which is controlled by the food chain’s founders. Subway’s sales are larger than Yum!’s by about 40% but because of Subway’s franchise system, it is hard to peg a value for the company. Food retail firm Tingyi would be a logical buyer. Yum! must be considered at target as well, to some extent because of its spectacular success in China. But, Subway is the more likely target because as a private company, it needs no shareholder approval

10. Domino’s – DPZ
> Value of Brand: (Comparabe: Pizza Hut: $3.973 Billion (interbrand])
> Market Cap: $1.05 Billion
> Stock 5 Year Performance: 39% Below S&P
> 5 Year High: $33.52
> 2010 Revenue: $1.57 Billion
> Sales Outside of US: 11%

Domino’s brand value is probably very close to that of Pizza Hut, its primary rival. That would put the figure at about $4 billion. Even if the Domino’s number is 50% of Pizza Hut’s, its brand would be worth double its $1 billion market cap and slightly more than one times its revenue. That makes the company a bargain in comparison to its brand value, if most other large publicly held companies are an indication. Domino’s has a large store count with over 9,000 outlets.  One of the attractions Domino’s has to a Chinese owner is that it has very little presence in China, which is unusual for a US based fast food company. If an owner in the People’s Republic could duplicate the success of Yum!, Domino’s value, and sales, would soar. Tingyi would be a logical buyer for Domino’s

Douglas A. McIntyre and Charles Stockdale

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