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Huang shadow looms over troubled Gome

By Ding Qingfen (China Daily)
Updated: 2009-05-28 08:08

A view of the Gome store in Wuhu, Anhui province. (Inset: Huang Guangyu). [China Daily]

China's largest consumer electronics retailer Gome is long on plans to retain its crown against potential challengers, notably second-placed Suning. But it is finding itself to be increasingly short on cash as bankers and retailers are shy on extending credit to the company struggling to break out of the shadow of its former chairman who has been detained by Beijing police for investigations into alleged irregular share trading.

The Hong Kong stock market, where Gome is listed, has been rife with talks of the company trying to raise new capital by selling shares to foreign buyers keen on entering the highly lucrative and fast-growing retail sector in China. The latest rumors are that the company is planning to issue new shares of up to 20 percent of its outstanding capital for sale to private equity firms KKR and Bain Capital LLC of the United States.

Not so fast, say legal experts in Hong Kong and on the mainland.

The new share issue needs to be approved by shareholders and such an approval would seem unlikely without a yes vote from former chairman, Huang Guangyu, whose whereabouts are still unknown.

Gome has appointed US law firm Sidley Austin LLP as advisor in this matter. Sidley Austin was Gome's legal advisor during its Hong Kong initial public offering in 2004.

A source close to the company said "very" intense negotiations are going on between Gome, its bankers, the stock exchange and the potential investors. The talks basically focus on the seemingly unsolvable issue of Huang's holdings.

"What it now comes down to is that no new shares can be issued unless Huang disposes of his 35.55 percent holdings in the company in an open and transparent transaction to willing buyers at a price that is seen by the investing public as fair and equitable to both sides," the source said. That, he insisted, would most probably require a public appearance from Huang, showing that he has agreed to the sale voluntarily.

But the sources declined to comment on details of the negotiation because of the many new variables.

He, however, indicated that some kind of consensus would be achieved as soon as early June.

Despite the fall in the share prices of Gome since the investigation of its founder Huang Guangyu began last November, a slew of investors at home and abroad are coveting the deal thanks to the market potential for China's consumer electronic sector and the network scale that Gome has. Private equity firms KKR and Bain Capital LLC are reportedly the potential winners. They are reported to be jointly bidding for the stake.

Last December, KKR said it plans to invest $100 million in Modern Farm, a Chinese raw milk supplier.

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