Bain Capital closed the book on a historically fraught relationship with Gome Electrical Appliance Holdings after Wednesday's close with a HK$1.041 billion ($130 million) clean up block trade that priced at HK$1.13 per share.
The US private equity firm made almost no money on the sale of the 5.4% stake, which it first purchased in July 2009 via as a convertible bond with a strike price of HK$1.18. At the time Gome was suspended and its founder, Huang Guangyu, under criminal investigation.
Potential investors no doubt queried why Bain chose to divest its remaining stake now. After experiencing so much trouble from Huang and his family, why would the private equity group sell out just as brokers are upgrading their buy recommendations on the stock?
Is Bain no longer confident about a turnaround plan, which has seen the Hong Kong-listed company consistently beat analysts' forecasts over the past year? Sources close to the deal say the most immediate spur was the looming blackout period ahead of year-end earnings.
More fundamentally, however, a group of hedge funds had been persistent with reverse enquiry demand and in the end Bain decided to hit the bid and use the funds it raised to invest elsewhere.
"Many funds have been reducing their net long exposure in the secondary markets, then making up for it by playing the primary markets," one banker commented. "Market sentiment is volatile and blocks are working well in current conditions."
In total, Bain sold 921.969 million shares at a 4.4% discount to the stock's HK$1.18 close. This represented the lower end of a HK$1.12 to HK$1.15 range, which equated to a 5.1% to 2.5% discount.
The largest single investor was a China-dedicated fund, which often takes cornerstone stakes in Hong Kong IPO's. It had not been part of the original reverse enquiry demand, but ended up with an allocation of about $10 million.
Not far behind it were four Asian hedge funds and together the top five investors accounted for about 50% of the book. The final order book closed multiple times oversubscribed with participation from 40 accounts.
UBS led the deal as it did for a previous block last July when Bain sold a 4.5% stake raising $130 million at HK$1.31 per share. Since then, Gome has slid 14%, although it has been on a rising trend since late December.
At current levels it is trading at about 10.5 times consensus 2015 earnings and nine times 2016 earnings. This puts it at a discount to other retailers such as Belle International Holdings on 12.7 times 2015 earnings.
Founder tries to beat Bain with 'get out of jail free' card
The valuation gap can be partly explained by the fact that Huang (Gome's controlling shareholder) has been behind bars since May 2010 serving a 14-year jail sentence for insider trading, bribery and other irregularities.
His determination to retain influence over the company he founded in 1987 led to a corporate governance battle with his own board and Bain that still hangs over the company today.
For private equity firms the saga also highlighted the potential dangers of taking minority stakes in troubled companies - in this case one where the chairman was under investigation and had gone missing at the time the investment was struck. Gome had initially been suspended in November 2008 and the Bain deal was agreed the following summer as a means of solving the company's capital crunch.
The private equity group initially hoped to acquire a 23.5% stake via a $233 million convertible bond and an open offer. When Gome's shares started trading again, investors responded positively, pushing the price back up from HK$1.12 to HK$1.89.
However, Huang re-surfaced in time to take up his rights and partially block Bain, leaving the latter with a 10% stake once it had converted the bond into equity.
He then used an annual shareholders meeting to vote out three Bain-appointed directors, only for the board to overturn the decision straight after. Further efforts to remove the Bain directors also failed.
For investors, the in-fighting underscored a very public lack of corporate unity just when Gome needed to start concentrating on the challenge to its bricks and mortar business from e-commerce platforms like JD.com. This, combined with previous overzealous expansion, meant the company reported a net loss in 2012.
Gome's share price fell to a historic low of HK$0.69 in the summer of 2012, a far cry from the HK$5.10 high it had recorded in early 2008 (on a split-adjusted basis). Since then, it has bounced back and the more positive houses currently have buy recommendations around the HK$1.80 to HK$2.10 level.
Will investors take a "chance" and pass go?
This optimism is based on the company's turnaround plan and its aim of doubling revenues between 2013 and 2017. Having closed non-performing shops in tier 1 cities, Gome has been targeting new shops in tier 3 and 4 cities where same-store sales growth has been much stronger.
As a result, third-quarter results showed double-digit same-store sales growth in tier 3 and 4 cities, where Gome plans to open a further 80 to 100 stores. This resulted in overall net profit rising 75% year-on-year to Rmb1.018 billion ($164 million).
The company's e-commerce strategy is also starting to bear fruit with e-commerce sales rising 72.7% year-on year. By 2017, Gomes hopes they will account for 20% of total sales, up from 6% in the third quarter.
Analysts also believe that company should be able to retain gross profit margins around the 18% level, as the government has been pushing energy efficient products, which Gome specialises in selling. However, Gome has said it is willing to sacrifice additional margin expansion above 18% in return for greater market share.
