Gome still trying to quell lender concerns over relationship with ex-chairman

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Gome Electrical Appliances Holding is still trying to quell concerns among some lenders over its relationship with former chairman and controlling shareholder Huang Guangyu, two sources familiar with the situation told dealReporter.

Most of the electronic retailer’s principle lenders have begun to conduct business as usual with Gome following its recent USD 418m rights offering and investment by private equity firm Bain Capital, the first source said, while others have taken a wait and see approach before fully coming back on board in terms of a fully fledged banking relationship. “This is a process that is happening gradually, so it has not recovered 100%,” the source said.

Even though Huang, also known as Wong Kwong Yu, slightly increased his stake in Gome from 33.7% to 34% following the completion of the rights offering, both sources said the he has not had an influence over the business or operations of the company since he stepped down from the board earlier this year after being taken into custody by the Beijing Municipal Public Security Bureau due to allegations stemming from his participation in “economic crimes.”

“But we also realize that until the investigation is resolved, there are many uncertainties over in the investment community, which in turn have affected the company’s commercial banking relationships,” the first source said.

Its principal lenders include the Bank of Shanghai, Standard Chartered Bank, CITIC Bank, Industrial Bank and Agricultural Bank of China.

The investigation

Earlier this month, Hong Kong’s High Court granted an interim injunction to freeze up to HKD 1.66bn of Huang and his wife’s assets, following an investigation launched by the Securities and Futures Commission [SFC] into a share repurchase program organized by the two in January and February last year.

However, since this is the SFC’s first investigation of its kind, the first source noted that it is incredibly difficult to predict the outcome and the length of the proceedings.

During this period he can neither vote at corporate meetings nor conduct personal business transactions of any kind, an official at the Beijing Municipal Public Security Bureau closely following the situation confirmed. But the official pointed out that since Huang had appointed his sister Huang Xiuhong to handle day-to-day operations at his privately-held investment vehicle Pengrun Investment before Huang’s assets were frozen, his sister can potentially take legal custody to conduct business on behalf of him.

A person close to Gome mentioned that this would include voting on his behalf at the company’s shareholder meetings.

Huang still remains under investigation though he has yet to be formally indicted, the official at the Beijing Municipal Public Security Bureau revealed. The investigation has dragged on for this long since Huang is thought to be involved in taking part in several crimes and the investigatory efforts being carried out is very complicated, the official added.

Besides Gome and Beijing-based Pengrun Investment, Huang also has a controlling stake in Beijing Centergate Technologies (Holding), which Chinese officials are expected to watch closely until the investigation is complete, the official said.

An official at the SFC confirmed that it intends to hold a hearing on 8 September to discuss the recent injunction, though it was unclear at this point which of Huang’s representatives are expected to attend the event. The second source familiar with the situation added that the company has no plans to send any officials or counsel to the hearing.

Bain’s future plans

After Bain converts its recently subscribed USD 233m 5% coupon convertible bonds due 2016, it will bring its interest to the company to approximately 24% and there have not been any recent discussions of raising the stake, the two sources familiar with the situation said. “Although they [Bain] are known as a buyout fund, in this case control is not the most essential part of their investment,” the first source noted. “With their current stake they’re happy.”

Gome can hypothetically issue more shares to Bain, perhaps via the issuance of new shares of up to 20% allowed under its general mandate, but the source said that it would be difficult to convince shareholders of the necessity as the company is no longer short of cash. In addition, because of China’s macroeconomic recovery, Gome can easily find other investors to take up a new share issuance, the source said.

The second source familiar with the situation said that Bain is expected to hold onto its stake for about three to five years, which is a relatively long time horizon compared to the private equity fund’s investments elsewhere.

413 store injection

Despite the ongoing investigation into Huang, Gome is likely to complete the purchase of up to 413 electronics stores held by Pengrun Investment by the end of 2010, the person close to Gome said. This is expected to make Gome the largest retailer in China in terms of its revenue and network size, the person added. As Gome has already expanded its network in major urban areas throughout China, the person explained that it is beginning to shift its focus to third- and fourth-tier cities to add to its revenue stream, the person explained.

This follows its acquisition of China Paradise Electronics Retail, proposed acquisition of Beijing Dazhong Electrical Appliance and partial acquisition of Sanlian Commercial in recent years.

Gome is also expected to gradually build down its presence in Hong Kong amid harsh competition from retailers like Fortress and Buynow, according to the person close to Gome and the second source familiar with the situation.

Gome is scheduled to release its interim results on 21 August.

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