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Huang shadow looms over troubled Gome

By Ding Qingfen (China Daily)
Updated: 2009-05-28 08:08

But according to yesterday's Bloomberg report, which cited unnamed sources close to the deal, Bain may buy the 20 percent share, paying about $500 million.

The Gome stake was valued at HK$2.9 billion as of November 21, the last day its shares were traded.

Gome had 1,300-odd stores at the end of 2008, compared with Suning's 850. Gome's share price nosedived to HK$1.12 on Nov 21, 2008, before trading was suspended, from a high of HK$21 in 2007.

To minimize the impact of dwindling exports on the nation's economy, China plans to inject 4 trillion yuan to stimulate domestic consumption, and recently rolled out a consumer electronics subsidy program to encourage rural consumers in buying electrical appliances.

China's consumer electronics market, whose growth rate has been slowing since last year, still has attractive potentials. Estimates put the market size at over 120 billion yuan in the sectors beyond the first- and second-tier cities for 2009.

Undoubtedly, the investigation of Huang, which is still ongoing, has cast a shadow over Gome. This in turn has also made commercial banks wary in granting loans to the company and also propelled Gome into its biggest crisis.

According to its financial report, Gome has debts of around 16.6 billion yuan, but cash and cash equivalent of only 3 billion yuan at the end of last year, compared with 6.3 billion yuan in 2007. More than that, Gome has about 4.6 billion yuan of convertible bonds due in 2014 and bondholders have the option to sell the debt back to the company in May next year, which means another great financial pressure.

Industry insiders say that in these testing times for the company, fundraising is the only way out.

Many believe that selling the shares owned by Huang is the best possible solution for Gome, as it should help the company get rid of the shadow of Huang.

Liu Buchen, senior consumer electronics analyst, is one of them. "The only way to dispel the doubts held by banks, suppliers and investors is to sell out or dilute Huang's stake in Gome, thereby reducing his power and influence on the company," he said.

Currently, Huang owns the majority stake in Gome, 35.55 percent. Chen Xiao, the present chairman, holds 7.28 percent, and the rest is with international investors like JP Morgan and Morgan Stanley.

The hitch, however, is that Huang's family is not keen on parting with the shares in such an easy way as it took Huang a lot of effort to build the business from scratch and make it a force to reckon with. Another problem is that Huang is not available to sign the contract even if the deal is finalized as he is still in police custody.

An unnamed source told China Daily that the share sale seems to be more favored by Gome management team, but faces stiff opposition from two high-level executives on Huang's side. There are many conflicts among the corporate executives and Huang is now choosing to keep silent, said the source.

Offering an additional share of 20 percent is probably more preferable, as Gome itself instead of the Huang family will get the cash through this method.

Gome's profit for 2008 fell 7 percent from a year earlier, due to the sluggish market. Its sales revenue, also for the first time, lagged behind Suning. The company is expected to disclose its first quarter figures later today.

The company also plans to keep the number of stores unchanged this year, by closing some stores and opening the same number of new ones. It also said it is focusing on improving the sales per store and the company's profitability this year.

Suning said late last year that it would open 200 new stores this year, and the company said it aims to surpass Gome by 2010. Analysts said Suning is more competitive as its sales and profit per store are higher than that of Gome.

(For more biz stories, please visit Industries)

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