Dorel Industries buying Chinese firm that makes goods for infants and children

MONTREAL - Dorel Industries will become one of the largest makers of strollers, high chairs and other products for children and infants in China with a deal Monday to buy Hong Kong-based Lerado Group for US$120 million.

Chief financial officer Jeffrey Schwartz said the acquisition will give Dorel more flexibility and allow it to "control its own destiny."

Though the acquisition is not expected to add to earnings in the first year of operations as Dorel integrates the new facilities, Schwartz said it was a strategic move.

"I think it's going to change Dorel. It gives us a whole new element that we never had before and that's manufacturing," he said in an interview.

Instead of relying exclusively on third-party suppliers, Montreal-based Dorel (TSX:DII.B) will be able to make its own products to sell in China and export around the world.

The acquisition, which will see Lerado's management and employees join Dorel, includes four facilities - three manufacturing plants in China and a research and development facility in Taiwan.

The plants will become Dorel's Asian juvenile production hub while also making products for other companies as a contract manufacturer.

By producing lower-priced products in-house, Dorel will be better able to compete for this business, Schwartz said.

"There was a part of the market that we were losing because we couldn't compete directly with a factory. There wasn't enough value-added on lower-end products to justify why we would make a mark up on top of the factory's mark up."

Meanwhile, higher-end strollers currently made in Europe, for example, will also be able to be produced in China for the Chinese market.

China is currently a "negligible" part of Dorel's juvenile sales, but new car seat laws and the growing middle class make it a "very interesting market" longer term, Schwartz said.

Dorel plans to continue making car seats at its facilities in the United States and Europe, but most of the other products have long been made in China.

The company said it will benefit from Lerado's new facilities and technology, including a recently constructed car seat crash test laboratory similar to those owned by Dorel in the U.S. and Europe.

The deal, which as been in the works for nearly a year, is expected to close later this year.

Analyst Leon Aghazarian of National Bank Financial said the acquisition is part of the evolution of the supply chain and competitive environment in the global juvenile market.

"While Dorel intends to keep using existing suppliers to a certain degree, the Lerado acquisition provides more supply chain control in a changing environment where some manufacturers are now acquiring brands and competing with Dorel," he wrote in a report.

Lerado is one of the main juvenile products manufacturers in China along with Goodbaby and Wonderland, the maker of Graco products. Goodbaby has been one of Dorel's main suppliers but stands to become one of its biggest competitors with its purchase of Evenflo and Europe's Cybex brand.

Analyst Mark Petrie of CIBC World Markets said the deal is driven by the desire to control supply and will take time to provide a financial return.

"Given Dorel's inexperience, and the need to improve current operations, we expect it will take some time for the benefits of the transaction to appear in the numbers," he wrote.

Dorel manufactures a number of children's products under the Safety 1st, Quinny, Cosco, Maxi-Cosi and Bebe Confort brands. It also sells bikes and cycling gear under the Cannondale, Schwinn, GT, Mongoose, IronHorse and Sugoi brands.

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