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Warburg Pincus buys 10% of GOME

(China Daily HK Edition)
Updated: 2006-02-03 17:52

GOME Electrical Appliances Holding Ltd and Warburg Pincus unveiled a deal yesterday in which the private equity firm would pay US$150 million for the right to buy almost a tenth of the mainland's top electronics retail chain.

Under the agreement, GOME would sell convertible bonds and warrants to Warburg Pincus to bankroll an aggressive expansion aimed at staving off homegrown rivals such as Paradise Electronics Retail Ltd, and potential foreign entrants such as Best Buy Inc.

Warburg Pincus, with about US$12 billion under management and another US$7 billion available for investment, has ploughed more than US$700 million into the mainland since 1995 in sectors ranging from real estate to retail part of a surge of private equity investment into the country.

GOME is keen to expand its share of the hotly contested US$55 billion electronics retail market, where scale is crucial for cost savings, to as much as 15 per cent by 2008.

GOME and its parent plan to open 200 outlets this year, on top of more than 400 across the mainland now. The listed unit said in December it planned to open about 100 stores in 2006.

The unit would acquire all of its parent's stores within five years, Huang added.

"The competition in this sector is getting worse," said Chairman Huang Guangyu, ranked the mainland's richest businessman by the widely used Hurun Report, with a fortune of US$1.7 billion.

"We've built up our network to a certain stage in 2005, so this year we want to enhance our competitiveness and efficiency," he told reporters in Hong Kong.

Under the deal, the US giant gets US$125 million in convertible bonds and US$25 million in warrants. Together, they give Warburg Pincus the right to buy 9.71 per cent of GOME over a period of five years, and win one seat on the board.

If fully exercised, Warburg Pincus would dilute Huang's shareholding to 59.62 per cent.

Mainland first

GOME's shares, suspended since Friday afternoon, have leapt over 15 per cent since the start of 2006 and last traded at HK$6.05.

The five-year convertible bonds come with an exercise price of HK$6.4 a near 6 per cent premium over the stock's last traded level while its five-year warrants would bear an exercise price of HK$7.7, or a premium of 27 per cent.

Yield to maturity on the bonds came to 3.26 per cent.

GOME and rivals are expected to face competition from foreign entrants hoping to tap a market where roaring economic growth has driven demand for everything from appliances to cell-phones.

The mainland's retail market Asia's largest after Japan has already seen billions of dollars of investment from the likes of the world's three biggest retailers: Wal-Mart Stores Inc, Carrefour SA and Metro AG.

Unlike a growing cohort of cash-rich mainland corporations buying or expanding into overseas markets to escape a saturated home sector, Huang said his firm would stay put for now.

However, GOME would not rule out buying a smaller rival if the price was right, he said. Indeed, Warburg Pincus would advise GOME on potential mergers and acquisitions, according to the terms of the agreement.

"First we claim China, then we look at the rest of the world," Huang said.

(HK Edition 02/03/2006 page3)