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Store wars

30 Jul 2015 By Quentin Webb

A jailed Chinese tycoon’s deal deserves a hard time. Huang Guangyu wants to sell hundreds of stores to GOME, the electrical goods chain he founded, for $1.45 billion. The complex, pricey-looking, and as yet poorly explained deal would give him majority control of the Hong Kong-listed group. Outside investors and independent directors, who are yet to opine on the deal, should ask if this is really the best they can get.

Huang, who was imprisoned for economic crimes in 2010, is seeking to offload 578 stores, already run under the GOME banner, for shares, warrants and HK$2.2 billion ($280 million) in cash. His shareholding would rise from 32.4 percent to 50.5 percent, or 55.3 percent if he eventually exercises the warrants. The current, convoluted structure is clearly suboptimal. And there should be financial benefits from putting the stores together – though GOME provides no concrete estimates.

Still, dealings with related parties always merit careful scrutiny. Here the listed group already has a good thing going, collecting 250 million yuan of fees from the sister chain. Taking on more stores would deepen the listed group’s exposure to physical retail, especially in poorer inland China, just as the mainland’s economy is slowing and as e-commerce is expanding at breakneck pace.

Nor are the finances inspiring. A fuller picture will be furnished before a shareholder vote. But last year’s unaudited numbers show a disappointing 2014 for the stores Huang owns. Their earnings actually dropped 20 percent to 284.7 million yuan.

Worst of all, because the new shares will be issued at a discount to the undisturbed price, the transaction would result in GOME shareholders giving up control without receiving a premium.

Outside shareholders have a chance to block this – and ought to think hard about doing so. Tweaking the deal to add cash would keep Huang in the minority. But it might be better to scrap the transaction altogether and wait for something better. GOME’s market value has halved in five years. If Huang wants to restore his influence, he could do worse than buy the listed company outright, freeing shareholders from their misery once and for all.


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