Springs Global Prospectus Reveals Plans

Orchestrating Consolidation and Expansion

By Brent Felgner -- Home Textiles Today, 8/7/2007 12:00:00 AM

Sao Paulo, Brazil —

Springs Global has taken the next step in its gambit to grow and thrive in a worldwide marketplace: It is now a publicly traded company on the Novo Mercado, part of the Sao Paulo Stock Exchange (BOVESPA).

With a bit more than half of the proceeds from its more than US$300 million public offering in Brazil used to pay down some of its existing debt, the remainder is the fuel for the US$2.7 billion supplier's further transformation into a truly worldwide manufacturer and seller of home fashions.

Company documents state Springs will further consolidate and close more U.S. operations, expand its production in South America and Mexico, as well as go shopping for capacity in India and China — markets where it also sees bountiful opportunity to sell its goods in exploding consumer economies.

"Our strategy is to maintain our leadership position in the industry by consolidating the bed and bath home fashions products industry globally and increasing our global market share by expanding our presence in Europe, Asia and counties in Latin America," Springs' prospectus declares. "We will expand into these markets through the acquisition of brands or introduction of our own brands, and by leveraging our unique capabilities."

Springs believes it has unparalleled strength to grow, at the same time acknowledging it must navigate through a minefield of international competitive threats and challenges from suppliers and even from its existing and prospective retail accounts.

Springs Industries and post merger, Springs Global, had a tradition of being insular and secretive as a very private company. So the company's prospectus leading up to the offering provided an unusual glimpse into its business — first, as it searched for ways to evolve and survive, and now as it tries to embrace a world of opportunity and danger.

Threats

Not the least of those dangers is that two-thirds of the Springs Global business is concentrated among just 10 customers, according to the company.

Among its key retailers are, in North America: Wal-Mart, Kmart, Target, Bed Bath & Beyond, Lowes, JCPenney, Linens 'n Things, Hudson's Bay Company and Sears; in South America: Carrefour, Companhia Brasileira de Distribuicao — Pao de Acucar, Wal-Mart, Lojas Pernambucana, Lojas Americanas, Coto and Riachuelo; and in Europe: Carrefour.

The other potential threats are well documented: competition and cutthroat pricing, fluctuations in the availability and pricing of raw materials and in currency rates, and a shedding of key management. Underneath it all is the possibility that it might misjudge fashion trends, introduce products that don't resonate, or simply fail to execute its business plans. Springs acknowledges all of those as potential risks

Springs Global shares closed Friday, Aug. 3 at $20.81 Brazilian reals, or US$10.94, a gain of 9.5% since it came to market the week of July 23 at R$19, the low end of its expected offering range.

Former co-chairman Crandall Bowles is gone, having ceded her remaining control of the business completely to Josue Christiano Gomes Da Silva, who led his company, Coteminas, into the 2005 merger with Springs Industries. The IPO in Brazil was the next logical step and very likely anticipated even before that tie-up was consummated.

The original merger has already yielded measured progress: Springs Global stanched its quarterly losses by more than half, reporting a net loss of R$83.8 for the first quarter ending March 31, 2007, compared to a loss of R$180.6 million for the same period a year earlier. The improvement has been mostly on the strength of lower labor costs: US$1.40 an hour in Brazil against US$14 in the United States. (By comparison, the company pointed out that labor in China and India costs about $0.70 per hour.)

So moving further capacity out of the United States seems inevitable. By the end of 2007, Springs says it will have a much smaller footprint in the U.S.

"At the end of 2006, we operated 31 plants in the United States, Mexico, Argentina and Brazil," the prospectus states. "We are transitioning capacity from eight of our North American manufacturing plants to our plants located in Brazil, Argentina and Mexico, as well as consolidating two manufacturing [bath rug] plants in the United States. When this process is completed, which is anticipated to occur at the end of 2007, we will operate 22 facilities, seven located in the United States, 12 in Brazil, and one in Argentina."

"We expect that by the end of 2007, all of our vertically integrated manufacturing capacity of sheets and towels will be located in Brazil and Argentina, except for one towel finishing plant in the United States," the prospectus states. "This will allow us to combine large scale, high efficiency, state-of-the-art facilities with competitive labor and energy costs, and give us access to low-cost raw materials."

Market drivers

Springs believes its market strength, brands and licenses will continue to drive a large part of its business, according to the document. It cites Wamsutta, Court of Versailles, Springmaid, Artex and Santista as market leaders. Wamsutta and Springmaid, it says, produce combined annual sales of about US$1 billion.

Just as significant, it positions itself as having the scale of a one-stop solution, with a 7% global market share, more than double its closest competitor.

"This platform results in a sizable competitive advantage as a number of customers are actively reducing their number of suppliers to cut down on costs and inventory, enabling us to continue winning business from our competitors," the company stated.

But global expansion is critical. The company plans to gain share by entering new markets through either strategic alliances or outright acquisition in both Europe and Asia. It also plans to expand its expertise in Asian sourcing to gain a stronger foothold in India, China and other developing nations.

"By establishing manufacturing facilities in Asia, we expect to have better control of our Eastern Hemisphere supply chain and be more efficient in servicing our customers in the United States and Europe. In addition, we intend to build our Asian manufacturing platform, which we expect will provide capacity for sales into these markets and further expand our presence in the region," the Springs Global prospectus said.