Gome to raise $417 million from Bain and others

Gome Electrical Appliance Holdings yesterday announced an investment agreement with Bain Capital Partners which will result in a cash injection of HK$3.2 billion ($417 million). This morning the retailer's stock will resume trading after a prolonged suspension brought about by the disappearance of the company's chairman last November.

As part of the agreement, Gome will issue $233 million of seven-year, renminbi-denominated convertible bonds to Bain, a global private investment firm with about $60 billion under management. The CBs will carry a 5% coupon and an initial conversion price of HK$1.18, which represents a 5.4% premium to the last traded price of HK$1.12 before the stock was suspended from trading on November 24, 2008. They can be put back to the company at any time after the fifth anniversary at an internal rate of return of 12%, including any interest paid up until then. The CB represents 12.8% of the company's existing share capital.

In addition to the CB, Gome will launch an open offer to existing shareholders, on the basis of 18 new shares for every 100 existing shares held. The new shares will be priced at HK$0.672 each, a 60% discount to the price before the suspension. Bain will fully underwrite the offer. If the open offer is completed, the conversion price on the CB will be adjusted to HK$1.108 per share.

The combined amount raised from the CB and the open offer will be $417 million. Once the deal is completed, Bain will hold between 9.8% and 23.5% of the enlarged issued share capital in Gome. Both transactions are expected to be completed by August 3.

In addition to its stake, Bain will have the right to nominate three non-executive directors to Gome's board.

"The enduring strength of Gome's business during a challenging period is a testament to the power of the Gome brand and its leading franchise in China," Bain managing director Jonathan Zhu said in a written statement.

The challenging period Zhu refers to includes not only the financial crisis, but also the scandal surrounding Gome's director and founder, Wang Guangyu (known in Hong Kong as Wong Kwong Yu). The event precipitating the suspension in the company's stock was the disappearance of Wang after he became the subject of an investigation looking into alleged stockmarket manipulation. Wang was suspended from his duties at Gome in December, and resigned the following month. He was replaced by Chen Xiao as chairman and CEO. However, Wang is still the controlling shareholder of the company with a 35.5% stake.

After considering the results of an internal audit, as well as an internal control review and financial review by international accountancy firm Ernst & Young, the findings of which were revealed yesterday, Gome's board confirmed that, as of November 30, there had not been any failures in the company's internal control system that led to the misappropriation of funds or assets.

Despite the controversy, Gome remains China's largest electronics retailer. In 2008 it had a 6.7% share of the sector's retail value, a 8.7% chunk of the sector's outlets, and 11.8% of total sales, according to data from consultancy Euromonitor. Coming in second in all of these categories is Suning Appliance Chain Store (Group), which had 4.8% of retail sales.

The home electronics market in China has benefitted from the government's attempts to boost consumption. Ever since December 2007, farmers buying electrical appliances can receive a 13% subsidy from the government. Electronics retailers, including Gome and Suning, became official suppliers for the scheme. From the initial trial in three provinces and one city, the scheme has spread across the country to 14 provinces, covering one-third of the rural population. The government will continue to give out these subsidies until 2012. Sales of home electronics are expected to increase at a compound annual growth rate of 11% until 2013, says Euromonitor, and rural demand will be a major driver.

In recent years, China's electronics retailers have expanded rapidly, but now same-store-sales are becoming more of an issue. At a press conference yesterday, Gome's CEO said the company will focus less on opening new outlets and more on improving sales in existing stores.

However, some companies are still keen on increasing their network. Suning said in a statement yesterday that it intends to raise up to Rmb2.8 billion ($409 million) by issuing as many as 200 million shares in a private placement. Of the total raised, Rmb1.4 billion will be used to open 250 new stores. It currently has 800 stores in 181 cities.

Gome was advised by Rothschild and Sons and Cazenove Asia, a unit of Standard Chartered. J.P. Morgan was the exclusive financial advisor to Bain.