Best Buy and Gome: good bedfellows?
There's a 50-50 chance that rumoured talks of a tie-up between Best Buy and Gome are true, but no acquisition is likely even if such talks have occurred
It's a relatively quiet news day, so I thought I'd take this opportunity to write about an intriguing rumour that would see struggling US electronics retailing giant Best Buy (NYSE: BBY) purchase its equally struggling Chinese counterpart Gome (0493.HK). There are quite a few reasons why there may be no truth to these rumours; but at the same time, there are also some indications that perhaps something is happening, which makes it worth taking a look at this potential tie-up.
From a broader strategic perspective, such a marriage would mark a major reversal after Best Buy shuttered all of its own-brand China stores two years ago, and would instantly give the US giant a major footprint in China's lucrative but highly competitive consumer electronics market. But on the downside, both of these companies are struggling with numerous internal problems and Best Buy probably wants to focus on cleaning up its own house rather than simultaneously tackling all the issues at Gome.
All that said, let's take a look at the latest headlines, which are surprisingly scarce for a deal of this magnitude. The main headline that caught my attention simply had Gome calling talk of a sale to Best Buy "pure rumours". Gome's statement, which was in response to talk on the Internet, went on to express its displeasure at the rumours, saying such chatter was hurting its business. Investors didn't seem to care too much about the talk, with Gome's shares inching down in the last few trading days of last week after the company issued its statement.
So now that we've seen the facts, let's take a look at the arguments for why such a deal may or may not be in negotiations. From a purely technical point of view, the fact that Gome didn't deny the rumours outright could signify that perhaps something is happening. In my years of reporting in China, most local companies would never hesitate to deny rumours even when those rumours were true.
Western companies are always more careful, simply saying they don't comment on market rumours or speculation rather than issuing outright denials. Thus the fact that Gome, a very Chinese company, didn't outright deny the rumours could mean that something is happening, even if it just means there were some very preliminary discussions with Best Buy.
Another reason why talks might be happening is related to one of Gome's biggest investors, private equity firm Bain Capital. Bain purchased about 10 per cent of Gome in 2009 and most likely wants to sell the investment before it loses more value, which looks almost inevitable as Gome's shares continue to sink. Bain could use its US connections to easily bring Best Buy into talks if the US retailing giant is interested.
Despite its own problems, Best Buy has vastly bigger resources than Gome and could probably provide strong assistance in turning around a Chinese company that last month issued a profit warning and said it would report a loss for 2012. Furthermore, Best Buy has also shown a previous interest in China, and still retains a presence in the country through its ownership of Five Star, a regional electronics retailer based in the city of Nanjing.
Now that we've looked at the arguments in favour of a deal, let's look at the ones that say such a deal probably isn't happening. One of the biggest of those is the lack of other media reports of such talks, which would usually be abundant if negotiations were really happening as major Chinese and foreign media used their extensive source networks to confirm the rumour.
As I stated above, the other major reason why this deal will probably never happen is that Best Buy needs to fix its own problems and is unlikely to want a major distraction like Gome right now. On the whole, I would put the chances that Best Buy talked to Gome, even if such talks were just very preliminary, at about 50 per cent. But even if talks occurred, I doubt we'll see an outright acquisition take place. Instead, we could see Best Buy perhaps buy Bain's 10 per cent in Gome, and then become more actively involved in Gome's management in the next year or two after it fixes its own problems.
Bottom line: There's a 50-50 chance that rumoured talks of a tie-up between Best Buy and Gome are true, but no acquisition is likely even if such talks have occurred.
To read more commentaries from Doug Young, visit youngchinabiz.com