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Electrical fire

29 October 2015 By Quentin Webb

Hong Kong investors have found a new target to assert their power: GOME Electrical Appliances. Outside shareholders have prodded the Chinese retailer into slicing almost a fifth off the price it is paying for a chain of sister stores controlled by jailed founder Huang Guangyu. That’s a significant improvement, even if the HK$9.1 billion ($1.2 billion) deal still hands Huang too much power.

The original cash-and-paper acquisition, unveiled in July, was pricey-looking, complex, and poorly explained. Now the group says drily that “helpful feedback” from outside stockholders – whose formal veto could have killed the deal – plus economic and stock market wobbles have persuaded it to shell out 19 percent less. That’s a sizeable, and sensible, reduction. Adjusting for service fees currently paid to the listed entity, the valuation has dropped to a more reasonable-sounding 14.4 times trailing earnings.

The revised deal is far from perfect. Selling the stores lifts Huang’s shareholding in GOME to 49 percent from roughly 32 percent. If he eventually exercises warrants at HK$2.15 – roughly 55 percent above the current share price – his stake will exceed 54 percent. So GOME is giving up majority control to Huang, currently serving a 14-year sentence for bribery and insider trading, without extracting a control premium. Secondly, gobbling up the 590 stores means GOME is bulking up in bricks-and-mortar retail, especially in poorer inland regions, just as China’s economy slows and e-commerce squeezes conventional businesses.

Nevertheless, the reduced price fits into an encouraging trend for shareholder action in Hong Kong. Institutions recently stopped China Merchants Bank handing cheap shares to directors, and protested the sale of a stake by CITIC Securities to China’s biggest pension fund. They even wrung marginally better terms out of Li Ka-shing for the $12 billion buyout of the mogul’s cash-rich Power Assets business.

Most of Hong Kong’s listed companies are controlled by tycoons or the state. So outside investors need to make the most of the structural protections they have. GOME is another welcome sign that they are showing some backbone.

 

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