Notional Pooling Sweetens Haier’s Candy Acquisition

When the Chinese multinational Haier acquired Italy-based Candy, it consolidated and integrated the new European treasury into its group structure. The household appliance company grappled with multiple countries, entities and currencies across the region and needed to find a way to gain greater visibility and efficiency with its cash management. A notional pooling solution provided by Bank Mendes Gans was the answer.

When multinational corporations arrive in Europe they are faced with numerous countries, multiple languages and several currencies. There are customs and cultures, rules and regulations, and processes and systems to navigate.

There is a long history of multinational corporations facing these challenges. Back in the 1960s, for example, Dow Chemical was one of the first US pioneers to venture into Europe and the corporation was confronted with the intricacies of doing business in the region.

In the decades since, there have been waves of corporates experiencing the same issues. One example is Haier, the Chinese household appliance company, which had a presence in a handful of countries in Europe. And when it acquired Candy, an Italian appliance company, in 2019 the complexity of its operations in Europe experienced a manifold increase.

The common thread to these examples is Bank Mendes Gans (BMG), a specialist provider of global liquidity and cash management services that has served corporates like these over the years. The Dutch bank facilitated Dow Chemicals’ move into Europe and the US company later became a shareholder of the bank, thus making it a specialist provider of treasury solutions. These days BMG is part of ING Wholesale Banking (ING), and its legacy of providing targeted solutions for multinationals lives on.

Haier’s European expansion

Haier, which is pronounced ‘higher’, certainly had higher ambitions for its expansion in Europe. Chris Tang, Group Treasurer at Haier Group, explains how the company already had a presence in six countries and after it acquired Candy, its market share and revenue in the region grew significantly. Its treasury function also changed; Haier’s centre of gravity in the region shifted from France to Italy, where Candy was located.

The European treasury centre is now based in Italy and Candy’s treasury function was integrated into Haier’s global platform. This was not an easy undertaking, however, and the Haier treasury team was faced with the complexity of being in 20 countries in Europe, with nearly 50 entities, in 18 currencies. Also, the treasury systems that Candy had differed from Haier’s; the Chinese company had SAP and Candy had its own ERP systems, sometimes with different arrangements for different countries. “We needed to centralise our treasury management, improve efficiencies, maximise our returns and also reduce costs”, explains Tang. “The change was significant, and we had to work with the Candy treasury team very closely to address those challenges”, he adds.

This work also came during a difficult time. Not long after the acquisition was completed, the global pandemic took hold along with lockdowns and logistical troubles, as well as the subsequent rise in inflation, a hike in interest rates and FX volatility. In this environment, managing liquidity became a top priority. The treasury team needed to manage cash, working capital, and the movement of cross-border funds efficiently. And to do this, it also needed to make decisions with real-time data.

On the ground in Italy

Mattia Giardini, Finance and Treasury Director, Haier Europe, who joined the company after the merger, notes how the acquisition brought the treasury operations of Candy into a different league. Now its banking partners are global institutions and the tools at their disposal are more sophisticated, he says. Previously, Candy was focused on Italian banks and short-term facilities, and now they are working with long-term debt and using commodity hedging, for example. “The difference is remarkable”, says Giardini of the way the treasury is now run after being acquired by Haier.

Giardini was tasked with optimising the cash management in Europe and embarked on a lengthy process of assessing various bank proposals. During the course of his career, he has set up approximately 10 cash pooling and notional pooling arrangements and is well versed in their finer details. “The process was long because we really wanted to make the right choice and take into consideration all the possible aspects”. Speaking from Qingdao in Shandong Province, Tang says, “Some companies will bring in consultants to support them in this process, but because we have an exceptional team there was no need for us to seek external consultants for the proposals”.

When it came down to the final decision, Giardini comments that BMG’s proposed solution was far superior to the others. The team was attracted to the strength of having ING as a parent company, as well as the elegant technical aspects of the solution and the convenience it provided. Giardini comments that the BMG notional pooling solution is “best in class and nothing compares with its flexibility” and the solution was selected because of its capacity to handle multiple currencies, as well as the cost savings that were possible.

BMG’s notional pooling solution

Haier implemented a multi-currency notional pooling arrangement in Europe, which has significantly improved the efficiency with which it manages its cash. The notional cash pooling enables the company to balance its accounts, by offsetting credits with debits, without physically moving the cash. It notionally pools the balances across the multiple entities in Europe whilst preserving their autonomy and not requiring them to have the funds in the same account. This creates many efficiencies, including greater transparency and a clearer picture of the company’s cash flow, a reduction in FX transactions, as well as optimising interest rates, and freeing up trapped cash.

BMG is a specialist provider and is the only bank in the world to engage exclusively in liquidity and information management solutions for multinationals. With this focus, it has developed a solution that is compliant and deemed sound by the regulators. As a niche institution, BMG offers cash management solutions to around 300 multinational clients, and this includes offering a true notional overlay cash pool.

Implementation

To get the solution set up, the pooling arrangement needed to incorporate various other financial institutions, and BMG needed to be put in touch with Haier’s other banks so that liquidity could be redirected to the notional pool. This was also an opportune time for the company to streamline the number of banks that it worked with in Europe, and it reduced its primary banks from around eight to four major financial institutions. BMG was able to connect the various institutions into the pooling structure without disruption, and set up the pooling without dismantling the banking arrangements that Candy previously had in place. And while some financial institutions were losing some liquidity to BMG, they were still keeping the local banking business with each of the entities.

There were numerous other people that needed to be involved in the process. Tang explains that it was very important that certain stakeholders were brought on board. This included tax advisors, who needed to ensure the withholding tax arrangements were sound. Also, legal and compliance were involved to ensure that the operations in different regions were compliant with the various local regulations. And Haier is listed in Shanghai, Hong Kong and Frankfurt, which also adds to its obligations, hence the need for further stakeholder engagement.

The impact of the solution

Once the notional pooling solution was in place, Haier significantly improved its liquidity management in Europe and was able to optimise its cash resources and reduce its financing costs. It is estimated that the solution saved the company millions of euros in interest per year and this came from only needing one hour a day to check in on the cash management activities of a region with approximately €4bn in turnover and dozens of legal entities. The company has also been able to reduce the amount of cash it needs on hand by about €30/40m, investing excess liquidity with very competitive rates and enabling those funds to be put to better use elsewhere.

The solution has worked well and there are plans afoot to expand the arrangement. The next phase is to take the notional pooling to the legal entities of Candy’s air conditioning business. The treasury team is also looking to gradually introduce other entities that are on Candy’s perimeter into the pooling arrangement, which will optimise the overall liquidity for Haier further. This will take some time, says Tang, and Haier is taking a long-term view of its plans for the region, with the company potentially expanding into more countries.

While Haier has been focused on building market share and revenue in Europe, it has also been able to make significant cost savings by streamlining its cash management. Giardini meets regularly with his CEO and CFO, and there is a philosophy that “cash is king”, with a strong focus on cash efficiency and cash returns, he says. The approach is one of cash conversion for the whole business, and in this respect, “the notional pooling has been a win-win for us”, he says.