Huang Guangyu is pulling off a deal to consolidate control in China’s second-biggest electronics retailer even while he’s behind bars.
The founder of Gome Electrical Appliances Holding Ltd., in a Chinese prison until 2024 for bribery, is set to boost his stake to as high as 55.3 percent after Gome announced plans to buy a company he owns. Gome’s shares plunged.
The Beijing-based retailer said Sunday it signed an agreement to buy Artway Development Ltd. for HK$11.3 billion ($1.46 billion) from Gome Management Ltd. Artway, which sells electrical appliances under the Gome brand name, is wholly owned by Huang, also known as Wong Kwong Yu in Cantonese.
Gome shares, which had been suspended July 20, tumbled 13 percent by the close of trading in Hong Kong to HK$1.27, the lowest since July 8. Its larger competitor Suning Commerce Group Co. closed down 10 percent in Shenzhen, while the Hang Seng Index lost 3.1 percent.
The cost of the acquisition is too high, and its synergy effect is unclear, according to Huang Yaoxin and Guo Haiyan, analysts at China International Capital Corp. The deal is not expected to result in any meaningful changes as Gome already provides management and purchasing services to Artway, the analysts, who maintained a sell rating on the stock, wrote in a note published Monday.
As part of the transaction, Gome will issue Gome Management 6.2 billion new shares, and 2.5 billion warrants that can be converted into new shares, the company said. The issuance will lift the Gome stake held by Wong and his associates to as high as 55.3 percent, from 32.4 percent at present.
“The acquisition simplifies the management and financial structure of all Gome stores, which paves the way for Mr Wong’s takeover upon his potential return,” Anita Chu, an analyst at Bank of Communications Co., wrote Monday.
Huang, sentenced to 14 years in prison in 2010 for bribery and insider trading, in 2011 forced the resignation of Gome’s former chairman to reassert influence over the board. He may face opposition from some shareholders on the latest deal as it would dilute Gome’s earnings, said Alfred Or, an analyst at Qilu International Holdings Ltd.
“I think at this stage, the shareholders will object to the deal most probably,” Or said. “If the deal is accepted, the share price will drop because it will lose part of the revenues and earnings due to consolidation.”
BlackRock Inc. controls 4.7 percent of Gome through several portfolios, while Morgan Stanley holds 3.8 percent and UBS AG funds have 3 percent, according to data compiled by Bloomberg.
Gome said an application will be made to the regulator in Hong Kong for a so-called whitewash waiver, intended to exempt Wong and Gome Management from making a mandatory general offer for the shares they don’t already own in the company. The waiver, if granted, would be subject to the approval of Gome’s independent shareholders, the filing said.
Artway has outlets located in regions that Gome doesn’t already have and the deal will allow the Beijing-based company to increase the number of its outlets by 50 percent to 1,714 in 436 cities, according to the statement. This would exceed those owned by Suning which has 1,628 stores in more than 290 cities.
Artway’s net income fell 20 percent to 284.7 million yuan ($46 million) in 2014, with sales up 7 percent to 21 billion yuan. Barclays Plc is the financial adviser for Gome.
Gome on June 23 announced a separate deal to pay 3.83 billion yuan to buy all of Beijing Dazhong Home Appliances Retail Co., an operator of appliances and electronics stores in the Chinese capital. The Artway transaction would help Gome benefit from “enhanced economies of scale and bargaining power,” it said in the statement.