These are dark times for Gome. Last November, falling demand had driven shares of the electronic appliance retailer down by 80% for the year, just in time for the company’s founder Huang Guangyu to be arrested for alleged "economic crimes."
Seven months later, Gome shares resumed trading, buoyed by a fresh investment of US$439 million by Bain Capital. Reports at the time said Bain could end up owning as much as 18% of the retailer.
Analysts said the deal was a rare opportunity for a Western private equity (PE) firm to lock down a stake in a proven industry leader in China. While we may not see many more transactions of its ilk, the Bain investment provided Gome with both cash and cachet. "Bain Capital is a highly respected PE firm. That stabilized people’s perceptions. Otherwise they might think that Gome is going to crumble because the chairman is in prison," said Liu Jing, a professor of finance and associate dean at the Cheung Kong Graduate School of Business in Beijing.
Nonetheless, the detained Huang managed to thwart Bain’s plans to boost its stake by spending US$70.4 million in an offering to existing shareholders that ended on July 27. The purchase of 816.3 million shares brought Huang’s stake in the company up to 34% from 33.7%, shoring up his position as the controlling shareholder. Bain was left with a stake increase of only 0.2%, leaving it with a total holding of 10% upon the conversion of US$233 million in seven-year convertible bonds.
Huang’s move raises questions as to how much control the PE firm has over the company. But with the election of three Bain members to Gome’s board, and the ability to help choose the CFO, Bain will have a substantial influence over the company, at least over the 12-month lockup period on its investment, said Sandy Chen, an analyst with brokerage Citi in Shanghai.
At present, the investment has been paper-profitable for the US PE firm.
"[Bain Capital has] already seen a great return based on where the price is now. It’s just about how quickly they want to get out," Chen said.
However, Gome may not be entirely out of the woods yet. At the time of writing, Huang had received another legal blow when Hong Kong securities regulators initiated a probe against him and his wife Du Juan for alleged securities trading violations.
