Funds Eye GOME Stake

HONG KONG (Reuters) – Top Chinese electronics retailer GOME, whose founder and ex-chairman is under police investigation, is in talks with potential investors and may issue new shares to raise capital, three people familiar with the matter told Reuters.

Potential investors have held preliminary meetings with GOME’s new management, which has been led by Chen Xiao since founder Huang Guangyu ran into legal trouble last year, the sources said.

The official Xinhua news agency has reported that Huang was the target of an investigation into stock manipulation.

An investment arm of Morgan Stanley (MS.N), Warburg Pincus LLC [WP.UL], Hopu Investment Management and Bain Capital are among the firms that held talks with GOME Electrical Appliances (0493.HK), according to three people who asked to remain anonymous because of the sensitive nature of the talks.

Warburg Pincus and Morgan Stanley are both existing shareholders of GOME, while Hopu is a $2.5 billion fund run by top Chinese dealmaker Fang Fenglei, who is also a partner of Goldman Sachs’ (GS.N) China investment banking joint venture.

Such meetings were informal, and no specific financial information was settled.

A new share issuance in a private placement could bring fresh investors to GOME and dilute the stake held by Huang, who resigned from the board but remains its controlling shareholder.

“The clear separation of Huang Guangyu and GOME’s business means the biggest uncertainty about GOME will be gone,” a GOME spokesman said, declining to comment further.

Huang, China’s richest person at one time, and his wife Du Juan together still hold about 35 percent of GOME shares.

Warburg Pincus and Morgan Stanley declined to comment. Bain Capital and Hopu Investment could not be immediately reached.


GOME asked Ernst & Young [ERNY.UL] to do a special audit of its financial situation after Huang was taken into custody. It hopes the audit will boost investor confidence if no unusual problems are found, the sources said.

Trading in shares of GOME has been suspended since Nov. 24 and will remain so until further notice, the company has said.

Sandy Chen, a Citigroup analyst who rates GOME stock “High Risk” and “Sell”, said in a research note on Monday that the audit is likely to be completed late this month, when trading of its shares may resume.

“Lots of funds are looking at or talking to GOME, but I feel nobody is serious at this moment,” said one source.

“They are waiting for the auditing result. Before they can get a clear picture, nobody wants to lead the risk,” he added.

Potential investors are also concerned about GOME’s business operations and long-term loan support by Chinese banks. It is facing more than 4 billion yuan of bonds that must be refinanced by May 2010.

On Wednesday, GOME said it will keep its retail network at about 1,300 stores this year, closing up to 100 poor performers but opening a similar number of new stores. [ID:nPEK338424]

“As long as GOME’s operation stabilizes and the ongoing auditor review does not reveal significant risk exposure, it would be reasonable to expect banks to gradually ease on GOME,” said Chen in her note.

Chinese banks might also loosen credit to be “politically correct,” given GOME’s estimate that more than 200,000 jobs could be at stake if it were to encounter difficulties, Chen added.

The people with knowledge of the situation said Beijing may get involved in the disposal of the stake held by Huang and his wife, pending results of the probe, which local media reported had recently widened to include senior government officials.

“Huang founded and built GOME, but we have a strong professional management team driving it forward today,” GOME’s spokesman said.

By George Chen
(Additional reporting by Michael Flaherty and Fion Li in Hong Kong, Samuel Shen in Shanghai and Kirby Chien in Beijing; Editing by Ken Wills)