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Gome shares surge after Bain Capital investment

(China Daily/Agencies)
Updated: 2009-06-24 08:08

Shares of consumer electronics retailer Gome Electrical Appliances Holdings more than doubled yesterday when trading resumed after US private equity firm Bain Capital agreed to invest up to $418 million.

Gome on Monday agreed a high-profile deal for Bain Capital to invest via convertible bonds and new share offerings, easing investors' concerns over the retailer's stretched balance sheet.

The deal, which would give Bain up to 23 percent of Gome's shares and make it the second-largest stakeholder, is a lifeline for Gome and should boost its earnings prospects, analysts said.

Related readings:  Gome to raise HK$3.24b via bonds, shares  Source: Bain Capital agrees to buy into GOME  Gome goes in for mega stores push  Gome sees 7% fall in 2008 net profit

"A major concern, the liquidity risk, has been removed," said Debby Zhu, analyst at KGI Securities, referring to the investment Gome would receive from Bain Capital.

Gome shares raced higher as they came off a seven-month trading halt, gaining 107 percent. At close, the stock was up 68.75 percent at HK$1.89.

The stock was suspended on Nov 24 after reports that Gome's ex-chairman and founder, Huang Guangyu, was being investigated for alleged financial irregularities. After the Bain deal, Huang would remain as Gome's top shareholder with 25.3 percent.

"The worst is over," Merrill Lynch analysts Chen Luo and Denise Chai said in a report yesterday, upgrading the stock to "buy" from "underperform". "Gome will remain as a going concern and a leader in China's robust retail market in the foreseeable future."

The retailer had faced "funding pressures" in the past seven months, Chairman and CEO Chen Xiao said at a press briefing in Hong Kong on Monday. The company's ratio of debt to equity quadrupled to 143 percent in 2008, according to data compiled by Bloomberg.

"We're very bullish on the market over the next several years and I am sure that was the major factor in Bain's decision to invest," said Thomas Manning, an independent director at Gome. "Companies like Gome are going to benefit from the surge" in incomes and demand in China, added Manning, who is also chief executive at Indachin Ltd, which provides banking and private equity advisory services.

Gome has 10 percent market share in China and 20 percent in the urban areas, Luo and Chai said. "China's retail industry is highly fragmented, and leaders of most retail segments only enjoy 1 percent to 2 percent market share."

The retailer, with 859 stores at the end of 2008, will relocate or close unprofitable outlets and slow store openings this year, Chen said. Gome will focus on opening "mega stores" to use floor space more efficiently.