Litigation

Acquisition by Usana Health Sciences gets them into China (legally, this time)

By Tracy Coenen

A few years ago, I was involved in an investigation of multi-level marketing company (MLM) Usana Health Sciences (NASDAQ:USNA).  One of the allegations that came out during that investigation was that Usana was illegally conducting business in China. China has strict laws against multi-level marketing, making it impossible for the company to do business there under its current MLM model.

Usana had legitimate business operations set up in Hong Kong, which does not have laws prohibiting multi-level marketing activities. It was alleged that Usana was using the Hong Kong employees to get access to people from mainland China, and show them how to circumvent the laws to participate in MLM.

Oddly enough, Usana’s business in Hong Kong went absolute gangbusters. To the point where it was obvious that something odd was going on. A simple look at the number of active Usana associates per population of any given country shows that things are amiss in Hong Kong.  Depending on the country, you might see one distributor for every one thousand to ten thousand residents of the country. In Hong Kong, however, you see one distributor for every 135 residents.

Looks a little fishy, doesn’t it? And it would seem to give some credence to the allegation that residents of China are being signed up as distributors in Hong Kong. What other explanation could there be for such an astronomically high rate of distributors to residents?

Usana has denied that it was trying to do business in China via Hong Kong.

But now it seems  that Usana has found a legitimate point of entry into China. The company recently purchased BabyCare Ltd., based in Beijing, for  $45 million in cash and 400,000 shares of company stock. And so Usana would seem to be getting around the multi-level marketing rules in China…

You see, China allows “direct selling,” but not MLM. Most MLMs in the United States and abroad like to refer to their business models as “direct selling” (implying that distributors sell the product directly to the customers). This focus on the sale of the product is an attempt to disguise the real business of these companies, which is recruiting new distributors (and recruiting multiple levels of people to sell overpriced  products gives us the “multi” in multi-level marketing).

In China, direct selling is allowed, but there is a strict licensing requirement. There are apparently only 25 such licenses in Beijing, and now Usana has one of them through BabyCare. The company intends to integrate its nutritional products into BabyCare’s lines as soon as they are approved by regulators.

While Usana may still have to be careful with how they structure a compensation plan in China, what really counts is that they’re officially in.

How desperate was Usana to get a foothold in China?  Usana paid $62,716,000 to acquire this company.

And this is a company with only $15 million in annual net sales and $19 million in total assets. The company has not been profitable.

Almost $63 million for an unprofitable company with relatively small annual sales. It looks like that direct selling license is worth tens of millions of dollars to Usana. Congratulations to them. They finally can do business legally in China, and they don’t have to funnel people through Hong Kong anymore!

Full post as published by The FRAUDfiles Blog on August 29, 2010 (boomark / email).