Gome Manages to Find Funding Despite Down Market, Legal Troubles

Gome, China’s second largest electrical appliance retailer has raised HKD 3.236 billion in Hong Kong and temporarily solved its funding shortage. Huang Guangyu, the company’s former chairman, is still under arrest for stock manipulation, and the company will need more time to recover from the crisis.
 
Gome has raised its funds from Bain Capital. After converting all the debt into shares, Bain Capital’s stake will be 23.5%, making it Gome’s second largest shareholder. The largest shareholder will still be Huang Guangyu’s family. The refinancing has comforted Gome’s investors. Gome’s share price leapt on June 23, when the trading of its shares resumed.

 
Huang Guangyu, Gome’s founder and largest shareholder, was detained by police on November 11, and his case has led to the dismissal of several senior government officials.
 
According to Gome’s current chairman Chen Xiao, Gome has been short of cash for some time. Gome began to think about refinancing after the National Day holiday, just as the home appliance market was declining quickly, but because of the global financial crisis, it became hard for Gome to find a proper investor.
 
Gome’s profit last year totaled 1.048 billion yuan, down 7.01% from 2007, the first time Gome has seen a decline since it went public in Hong Kong in 2004.
 
There is more pressure come from 4.6 billion yuan convertible debt coming due next year, further adding to Gome’s financial pressure. Chen Xiao said there was no window for Gome’s financing, and few investors on the market are willing to invest in the firm.
 
The capital market have begun to rebound since the end of the first quarter of 2009, and Gome’s relation with its business partners is also recovering gradually. Gome contacted almost all the big investment funds, hoping to raise the money it needed by equity restructuring.
 
As Gome’s market share in Mainland China totals about 12%, the government does not want Gome to be controlled by foreign capital, so Gome could only seek financial investors, not industrial investors. Finally, Bain Capital stepped up.
 
Although it has already gained the funding it needs, Gome is still facing the consumption downturn and challenges from competition. Gome’s major rival Suning has overtaken Gome to become China’s largest electric appliance retailer last year. It has just acquired control of struggling Japanese retailer Laox and is looking to march into that market. Chen Xiao said in future Gome would focus on internal adjustment, instead of opening more stores.
 
More uncertainties spring from Huang Guangyu and his family, and Huang’s legal fate will undoubtedly affect Gome’s development strategy. Gome is trying its best to temper the influence of the issue, but Huang Guangyu’s family is still in control of Gome, even if Huang Guangyu is in jail now. The Chinese government is handling the issue so the company will not be greatly influenced by it, but shocks will be unavoidable. Whether Huang Guangyu’s family will be able to handle the relationship with Bain Capital well will be the key for the success of the investment.

 

Tags: Gome   Bain Capital   Huang Guangyu