New Era Cap Co. has signed a production and distribution agreement with a Chinese head wear manufacturer in a deal that also gives it the option to buy as much as a 20 percent stake in the Asian company.
New Era has signed a seven-year deal with Mainland Headwear Holdings Ltd., a Chinese manufacturer that already makes head wear under license for U.S. companies such as Timberland, Warner Brothers and NASCAR, the Buffalo-based company said Tuesday.
The deal is not expected to affect the company's U.S. manufacturing operations, said Peter Augustine, New Era's president.
"This is new in a lot of ways for us," Augustine said. "It's the first time we've taken a direct stake in one of our suppliers."
As part of the deal, New Era has an option to buy a 5 percent stake in Hong Kong-based Mainland next year and options to buy additional shares in 2010 and 2011 that could boost its total stake in the company to just under 20 percent.
"We believe this partnership is mutually beneficial to both companies and will provide New Era access to lucrative Asian retail markets and potentially millions of new and enthusiastic customers," said Christopher H. Koch, New Era's chief executive officer, in a statement.
The potential ownership stake would give New Era more control and oversight over Mainland's production than it would have under a typical supplier relationship, Augustine said.
New Era will get the right to appoint a member to Mainland's board of directors if New Era has acquired at least a 9 percent stake in Mainland between April and October of 2009. New Era would be forced to relinquish the board seat if its stake drops below 10 percent at any time in 2011 or beyond.
The deal also allows New Era to replace the production capacity it lost about 18 months ago when the company decided to stop doing business with another Chinese supplier that it did not identify.
The deal will help the company meet its growing demand in Europe and other international markets, while giving it a foothold in the potentially lucrative Chinese market, where Mainland already has a retail presence, Augustine said.
The agreement, which begins on Jan. 1, calls for New Era to purchase a minimum of $5 million in products from Mainland next year, which is less than 2 percent of the company's annual sales of around $350 million.
That minimum purchase requirement rises to $15 million in 2010 and $17.5 million in 2011, before peaking at $30 million a year from 2012 through 2015.
Meeting those minimum purchase requirements also is important because New Era could receive discounts of between 12.5 percent and 20 percent on the price of the Mainland shares it is eligible to buy. Those discounts hinge on Mainland's future share price and whether New Era meets its purchase targets during the first half of the appropriate year.
Based on current prices, and with the smallest discount, it would cost New Era about $6.5 million to acquire the 20 percent stake.
Mainland was fined $110,000 last year by labor authorities in southern China after more than 90 percent of its 3,000 employees were forced to work 40 to 53 extra hours during May 2007. Mainland, which was licensed to make souvenirs for the Beijing Olympics, later paid the workers for their overtime.
New Era officials said the deal will help the company monitor labor conditions and ensure that Mainland's workers are paid a "fair living wage" and have a work environment that meets safety and international standards.