US-based private equity firm Bain Capital will invest $233 million for a 12.8 percent stake in GOME Electrical Appliances Holding.
The investment is structured as a seven-year, 5 percent coupon, convertible bond, which has an initial conversion price of HK$1.18 ($0.15; €0.11) per share, according to a GOME statement that confirms earlier reports of a signed deal.
GOME is also offering new shares to its shareholders at HK$0.67 per share, in an open offer backstopped by Bain. The open offer will dilute Bain’s potential stake of 12.8 percent to 9.8 percent. However, assuming the full conversion of Bain’s convertible bond and subject to shareholders’ participation in GOME’s open offer, Bain will hold a stake of between 9.8 percent and 23.5 percent in the company and possess three non-executive director seats on the company’s board.
The transactions are expected to be completed by 3 August 2009. GOME, which suspended its trading in November 2008 at HK$1.12 per share, will resume trading on 23 June 2009, the statement said.
The deals are expected to raise at least $417 million for GOME to “meet the funding needs of the business”. GOME will concentrate on “network rationalisation, effective cost control and profitability enhancement” in 2009. The company, which currently operates China's largest retail network and has 151 distribution centres, is also seeking to further expand its retail network, it said.
Bain’s deal ends months of speculation. As early as January, Bain and fellow buyout firms The Carlyle Group, Kohlberg Kravis Roberts, Warburg Pincus and Hopu Investment Management were widely reported as interested bidders in the electronics retailer. Warburg already owns a stake in GOME, estimated at less than 5 percent as of January.
The company does not face a cash crunch in the short term but it does face longer term financing pressures in the form of convertible bonds, which are due in 2010, according to a person familiar with the matter.
The trading of Hong Kong-listed GOME's shares were suspended after its founder, chairman and executive director Huang Guanyu was detained for alleged share price manipulation, according to media reports. The company has not received any notice from any authorities in connection with the allegations.
Huang resigned as director of the company in January, although he still owns a controlling stake of about 36 percent.
According to the statement, the board confirmed there were no “deficiencies in the group's internal control system in any material aspect or any misaappropriation of funds or assets” as of 30 November 2008.
Set up in 1987, GOME is one of the largest retailers of electrical appliances and consumer electronics in Mainland China and Hong Kong.