May 27 (Bloomberg) -- Bain Capital LLC may buy as much as 20 percent of Gome Electrical Appliances Holdings Ltd., China’s second-largest electronics retailer, four people familiar with the discussions said.

Bain may pay about $500 million for the stake, two of the people said, asking not to be identified because the talks are confidential. Bain is competing for Beijing-based Gome with KKR & Co. and Warburg Pincus, the people said.

Gome’s more than 800 stores in at least 160 Chinese cities make it an attractive target for investors faced with stagnant economies in the U.S., Europe and Japan. KKR and TPG Inc. are among private-equity firms that have sought stakes in companies tied to domestic consumption growth in the past year.

“Prospects for the consumer industry are good in the long term,” Fiona Wong, a Hong Kong-based analyst at Sun Hung Kai Securities Ltd., said in a phone interview. “The government has been handing out incentives, like subsidies for rural consumers to buy appliances, and these policies should help.”

China is pumping 4 trillion yuan ($585 billion) into spurring the domestic economy to wean the country from its dependency on exports, which accounted for a fifth of gross domestic product growth in 2007.

While Bain is in the final stage of talks with Gome, the retailer hasn’t formally picked the U.S. buyout company as its preferred buyer, a move that would exclude rivals, the people said. KKR and Warburg are still pursuing the stake, three people familiar with the matter said.

Chairman’s Arrest

Spokesmen for Gome, Bain, KKR and Warburg Pincus in Hong Kong, London and New York either declined or weren’t immediately able to comment.

Negotiations with potential investors have yet to reach “a binding agreement,” Gome told Hong Kong’s stock exchange today. The company’s shares will remain suspended pending the release of “further information relating to the fund-raising exercise and other price-sensitive information,” it said.

The Gome stake was valued at HK$2.9 billion ($374 million) as of Nov. 21, the last day the shares were traded. The stock was halted after the arrest of former Chairman Huang Guangyu for “economic crime.” Beijing police confirmed at the time they were investigating Huang and have since declined to comment.

Huang, who was last year ranked China’s second-richest man by Forbes, holds 34 percent of the company. He quit as chairman in January and resigned from the board.

Cutting Debt

Selling the stake will help Gome reduce debt and boost reserves. The company had cash and cash equivalents of 3 billion yuan at the end of last year, compared with 6.3 billion yuan in 2007, according to its annual report. Interest expenses were 212.1 million yuan, from 193.4 million yuan in 2007.

Gome has about $670 million of convertible bonds due in 2014. Bondholders have the option to sell the debt back to the company in May next year, according to a sale document.

Some of the stores operating under the Gome brand are owned by Huang, and have had insufficient cash flow, according to two of the people.

The final size of any transaction may change, depending on the further capital needed and how the Huang-owned stores are dealt with, the people said.

The company reported today that first-quarter profit plunged 37 percent from a year earlier as sales fell, without providing reasons for the declines.

Gome’s shares slumped 77 percent to HK$1.12 in the 11 months leading up to Huang’s arrest. Bigger rival Suning Appliance Co. has gained 48 percent since then, while the Hang Seng China Enterprises Index has advanced 51 percent.

Consumer Subsidies

China is offering incentives such as subsidies to spur purchases of some kinds of home appliances. Sales of goods to the U.S., Europe and Japan slumped after recessions prompted consumers there to trim spending.

KKR plans to invest $100 million in Modern Farm, a Chinese raw-milk supplier, two people said in December.

TPG Capital, a unit of Fort Worth, Texas-based TPG Inc., in May said it bought $81 million of convertible bonds with warrants issued by Daphne International Holdings Ltd., owner of the Daphne and Shoebox brands in China.

To contact the reporters on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net; Wing-Gar Cheng in Hong Kong at wgcheng@bloomberg.net

Last Updated: May 27, 2009 11:06 EDT