June 8 (Bloomberg) -- Bain Capital LLC agreed to buy about 16 percent of Gome Electrical Appliances Holdings Ltd., China’s second-largest electronics retailer, for about $300 million, two people with knowledge of the matter said.
Bain Capital plans to acquire about $200 million of seven- year convertible bonds issued by Gome and buy part of a $230 million stock offer by the company, the people said, asking not to be identified because the talks are confidential.
The deal marks Bain Capital’s biggest acquisition in China, where the government is spending 4 trillion yuan ($585 billion) to halt a slowdown in the world’s fastest-growing major economy. Beijing-based Gome has more than 800 stores in at least 160 Chinese cities, attracting investors faced with recessions in the U.S., Europe and Japan.
“The key for Gome is support from suppliers, which is more likely with Bain” buying a stake, Keith Li, a consumer analyst at CIMB-GK Securities (HK) Ltd., said in a phone interview today. An investment by Bain will help Gome “gain back market share” lost to larger rival Suning Appliance Co., he added.
Gome had a market value of HK$14.3 billion ($1.84 billion) on Nov. 21, the last day its shares were traded. The stock was halted after former Chairman Huang Guangyu was arrested for alleged economic crimes. Beijing police confirmed at the time they were investigating Huang and have since declined to comment.
Convertible Bonds
Tim Payne, an outside spokesman for Gome, declined to comment late yesterday. Alex Stanton, a spokesman for Bain Capital, didn’t respond to phone calls outside of regular business hours. The Wall Street Journal reported the agreement earlier, citing unidentified people.
The convertible bonds represent 12 percent of Gome’s current equity and 10 percent of the enlarged capital. The stock sale, which Bain will underwrite is equivalent to about 18 percent of Gome’s existing capital, the people said.
The bonds can be converted into Gome shares at HK$1.18, and the company will sell stock to existing investors at 67.1 Hong Kong cents apiece, the people said. Gome shares are set to resume trading this week, they said. The stock was last priced at HK$1.12.
Bain to Appoint Directors
Bain Capital will become Gome’s second-biggest shareholder following the transaction, after Huang. The private-equity company will appoint three directors to Gome’s 11-person board, one of the people said.
Huang, China’s second-richest man last year according to Forbes, holds 34 percent of the company. He quit as chairman and resigned from the board in January. Chen Xiao has taken over as the company’s chairman.
Gome will also manage the more than 400 stores controlled by Huang, one of the people said.
The size of Bain Capital’s investment will depend on how much of the stock offer investors subscribe to. The U.S. private equity fund is expected to assume Huang’s rights to buy into the share sale, the people said.
Gome is the third investment in China’s consumer industry since 2006 by Bain Capital’s Asia team. The buyout firm has bought stakes in Jinsheng International Home Furnishings, which operates shopping malls for decoration, furniture and electronics retailers, and Shandong Tralin Packing, a manufacturer of paper packaging for liquid food in China.
Gome Debt
The $430 million from the deal will help Gome repay debt. The company has about $670 million of convertible bonds maturing in 2014, and investors have the option of selling the debt to the company in May next year, according to a sale document.
Gome shares slumped 71 percent in the year leading to their Nov. 21 suspension. The Hang Seng China Enterprises Index has advanced 68 percent since then.
Suning fell 0.8 percent to 14.96 yuan at the 11:30 a.m. break in Shenzhen trading, trimming its gain since Gome’s suspension to 53 percent.
“China’s consumer plays have rebounded quite significantly in the past six months and even if Gome’s earnings are unchanged, it will definitely be attractive,” CIMB-GK Securities’ Li said.
Gome’s net income fell 7 percent to 1.05 billion yuan last year after preferential tax rates expired, while sales gained 8 percent to 45.9 billion yuan.
Suning’s profit grew 10 percent to 2.17 billion yuan on sales of 49.7 billion yuan in 2008.
