Yesterday, COFCO Packaging, a packaging manufacturer under COFCO, and JDB announced that they had signed a repurchase agreement to resolve a long-running dispute. This also means that on the eve of the well-known herbal tea beverage company's IPO, their capital cooperation has come to an end, and JDB will have to go it alone for now.

COFCO Packaging stated in an announcement that, based on syndicated loan support, it reached a repurchase agreement with JDB today to "properly resolve the dispute."

Through the agreement, COFCO Packaging will recover all investment funds and promised dividends previously made in Qingyuan JDB Herbal, "significantly enhancing the company's cash flow and optimizing asset allocation, better focusing on the consumer packaging main business, significantly improving profitability, and increasing shareholder returns."

Qingyuan JDB Herbal is a core enterprise under JDB.

This resolution may have surprised many. The trigger for this dispute was JDB's "broken promise" to inject its core asset—the JDB trademark, valued at RMB 3 billion—as an in-kind contribution into Qingyuan JDB Herbal, as agreed in the capital increase agreement.

This angered COFCO Packaging, which subsequently filed for arbitration with JDB in July 2018 and announced in November last year that it had won the arbitration, requiring JDB to compensate COFCO Packaging RMB 200 million and inject the trademark.

So, how exactly will this repurchase work?

According to COFCO Packaging's introduction today, JDB's subsidiary JDB (Tianjin) will repurchase the 30.58% equity stake held by COFCO Packaging Investment in Qingyuan JDB Herbal for approximately RMB 1.5 billion. The repurchase will be conducted in two installments, with the second installment due on or before July 31.

Additionally, JDB will need to pay for the promised dividends—Qingyuan JDB Herbal owes COFCO Packaging Investment approximately RMB 238 million in cumulative promised dividends under the capital increase agreement, to be paid in seven installments by the end of 2021.

Historical data

"After signing the repurchase agreement, the Group will continue to maintain a strategic cooperative relationship with JDB Group, expand the Group's can supply business to JDB's related companies, support JDB Group's overall listing, and make the JDB trademark an internationally renowned brand." COFCO Packaging stated in tonight's announcement, adding that it will also continue to optimize the capacity utilization and profitability of its two-piece can production, continuously improve the domestic competitive landscape, and further consolidate its industry leadership.

Although the announcement did not further elaborate on JDB's listing plans or how to support its becoming an "internationally renowned brand," it is certain that the two parties have made new commitments: these include JDB giving priority to purchasing aluminum beverage cans from COFCO Packaging Investment and/or its affiliates, and COFCO Packaging not taking any legal action against JDB before July 31, provided that JDB (Tianjin) and Qingyuan JDB Herbal complete the payment of the first installment of the consideration and the first installment of the promised dividends.

It is worth noting that today's announcement also disclosed the latest financial performance of Qingyuan JDB Herbal.

As of December 31 last year, Qingyuan JDB Herbal turned from profit to loss, with net profit after tax dropping from RMB 3.16 million a year earlier to a loss of approximately RMB 39.94 million last year, while net assets increased from RMB 2.655 billion to RMB 2.913 billion.

The origin of the "dispute" between COFCO Packaging and JDB can be traced back to 2017.

In October 2017, COFCO Packaging announced that COFCO Packaging Investment, the JDB trademark holding company (referring to JDB's Wanglaoji Company registered in Hong Kong), Qingyuan JDB Herbal, and its existing shareholders had signed a capital increase agreement.

Under the arrangement, COFCO Packaging Investment would inject RMB 2 billion into Qingyuan JDB Herbal, thereby holding a 30.58% stake. Of this, RMB 1 billion would be paid in cash, and the remaining RMB 1 billion would be in-kind contribution in the form of aluminum two-piece beverage cans produced by the company.

COFCO Packaging explained its motivation at the time: the parties would jointly build a comprehensive operating platform integrating the JDB brand, concentrate, and supply and marketing system, and it "will work with JDB Group to leverage their respective resource advantages to enhance JDB herbal tea's market leadership and promote the healthy and sustainable development of the herbal tea industry."

If all had gone smoothly, after the capital increase, Qingyuan JDB Herbal would have been held by COFCO Packaging Investment, Wanglaoji Company, and Zhishou with approximately 30.58%, 45.87%, and 23.55% stakes, respectively. COFCO Packaging would thus become the second-largest shareholder of Qingyuan JDB Herbal.

In 2018, after announcing this investment, JDB's new president, Li Chunlin, set "achieving a successful company listing within three years" as one of the strategic goals. After JDB put its listing on the agenda, Zhang Xin, chairman of COFCO Packaging, also stated at an analyst meeting that COFCO Packaging would be an important participant in JDB's future listing process.

However, the "harmonious" relationship between the two parties did not continue as originally scripted.

Less than four months after Zhang Xin's public statement, COFCO Packaging suddenly announced that it would initiate the aforementioned arbitration with JDB. After the arbitration result was announced, JDB stated in a statement that the two parties would continue to promote JDB Group's listing, and subsequently paid COFCO Packaging a goodwill deposit of RMB 250 million.

Interestingly, JDB had previously released a message about changes to its partnership mechanism, which mentioned "listing" multiple times. According to this official announcement, JDB announced that it would upgrade the original "bonus share incentive mechanism" for management only to a "JDB Partner Mechanism" covering frontline marketing office heads and factory managers.

"The 'JDB Partner Mechanism' conforms to the general trend of the sharing economy era, in the ever-changing 2020 with both challenges and opportunities," JDB said.

Source: Xiaoshidai (ID: foodinc)

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