Gome offers $5.2b for Paradise
Falling margins and intensifying competition trigger urge to merge in electronics retail sector
Gome Electrical Appliances Holdings, China's biggest electronics retailer, will offer $5.27 billion in shares and cash to buy out rival China Paradise Electronics Retail in a bid to ease falling margins and strengthen its position amid intensifying competition.
Gome will pay China Paradise shareholders 0.3247 of its new shares plus 17.36 cents cash per share. The offer represents a 9 per cent premium to China Paradise's market value before trading was suspended on Monday last week.
Shares of China Paradise, the third-largest electronics retailer in the mainland, traded at $2.05 before suspension, almost 10 per cent below its initial public offering price of $2.25 in October last year. Shares of Gome, suspended Tuesday last week, last traded at $6.35.
Gome, which is advised by Goldman Sachs, proposed that chairman Wong Kwong-yu, China's richest man, remain chairman of the merged entity while China Paradise chairman Chen Xiao would be chief executive.
Fierce competition, intensified by the entry of foreign retailers including United States-based Best Buy, has been eroding profit margins in the fragmented industry.
Best Buy agreed to buy Jiangsu Five Star Appliance, the fourth-largest electronics retailer in China, for US$180 million in May and was reportedly in talks to buy Shandong-based Sanlian Commerce.
China Paradise, which dominates the Shanghai market, agreed to buy Beijing Dazhong Electric Appliance, No5 in the industry, in April in a deal awaiting regulatory approval.
Gome said the merger with China Paradise would integrate the procurement and supply chain management of both companies and reduce operating expenses.
'We consider the long-term synergy rather than short-term benefits,' said Wilson Tong, financial controller of China Paradise, adding that China Paradise's proposed acquisition of Dazhong will proceed.
Gome said it had 296 stores in the mainland in the first quarter, China Paradise had 205 and second-ranked Suning Appliance 224. Mr Wong also privately owns 196 Gome stores, including those in Shanghai.
The merger will make Hong Kong-listed Gome's retail network more than double that of Shenzhen-listed Suning, which raised 1.2 billion yuan last month in a secondary share offering to fund its plan to add 100 stores.
'In general, we believe this co-operation is good for the development of the industry as a whole,' a spokesman for Suning said.
After buying out China Paradise, Mr Wong and his associates will hold 51.2 per cent of the enlarged Gome, Mr Chen and other key China Paradise shareholders 12.5 per cent and Morgan Stanley, which holds a 9.5 per cent interest in China Paradise, will hold 2.4 per cent.
Mr Chen, Morgan Stanley and the key shareholders of China Paradise had agreed to tender their combined 31.17 per cent stake to Gome.
Another 30 per cent stake of China Paradise, owned by Mr Chen and other shareholders, is still in the lock-up period because of the IPO but will be freed before the deadline of the Gome offer.