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Bain Capital Bets on China's GOME

Posted by: Dexter Roberts on June 24, 2009

Following a seven-month trading suspension, electronic retailer GOME’s Hong Kong-listed shares soared 70% on June 23, following the announcement that Bain Capital will buy as much as 23.5% of the mainland company. GOME will raise at least $417 million by issuing convertible bonds to Bain Capital, as well as through a new share offering that the U.S. private equity firm will underwrite. Bain Capital too, will now get to have three non-executive directors on GOME’s 11-member board.

“Today’s announcement is an important moment in GOME’s history and marks the beginning of a new phase in the company’s development. Through our agreement with Bain Capital, one of the foremost private equity groups in the world, GOME gains a solid financial base to support our future growth and improve our corporate governance as well as a partner with deep experience working with world-class retail companies,” said Chen Xiao, Chairman and President of GOME in a June 22 press release.

“We are honored to enter into a long-term partnership with GOME, China’s leading retailer,” said Jonathan Zhu, Managing Director of Bain Capital, also in the same press release. “The enduring strength of GOME’s business during a challenging period is a testament to the power of the GOME brand and its leading franchise in China. We believe the Company has attractive future growth opportunities.”

Despite the bullish statements—not to mention the vote of market confidence—a cloud still hangs over the mainland retailer’s future. GOME’s largest shareholder, founder and former chairman Huang Guangyu, is still awaiting charges on unspecified “economic crimes.” And in years past, Chinese companies that have seen their founders charged with serious financial crimes have, as often as not, ended up collapsing. That was the case with dodgy entrepreneur and wanna-be North Korea business-broker Yang Bin and his Euro-Asia Agricultural Holdings back in 2002. And that’s what happened when Shanghai Land Holdings founder Zhou Zhengyi went down too.

And even if Huang’s fate doesn’t end up hindering GOME, there is plenty of normal business competition ahead. Local rival Suning Appliance is growing strongly and outperformed GOME last year—and GOME’s chairman wasn’t’ detained until November. Indeed, Shenzhen-listed Suning saw its 2008 revenues grow 24.27% to 49.9 billion yuan, while its profits were up an impressive 48.09% to 2.17 billion yuan. It opened 210 new stores and by the beginning of this year, had 812 outlets in 178 cities across the mainland. GOME, for its part, saw revenues grow just 8.03% to 45.89 billion yuan, while profits actually decreased by 7.02% to 1.05 billion yuan. And while GOME’s store network exceeded Suning’s, with 859 stores in 205 cities (GOME’s parent company has almost 500 more stores that aren’t part of the Hong Kong listed company), it only added 133 stores over the previous year—significantly less than Suning’s tally. Both companies too will have to put extra effort into expanding into as of yet untapped hinterland markets like the mainland’s southwest—China’s traditional growth markets along the coast have seen a dramatic decline in part due to the global financial crisis.

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