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China Eagle Group buys 65 per cent of the mainland appliance company that will skirt a ban on back-door entry

The mainland's  leading home appliance chain will achieve a Hong Kong listing  through a related-party transaction with its chairman's main-board vehicle in a deal worth 8.8 billion yuan.

Locally listed China Eagle Group yesterday announced that it would buy 65 per cent of Gome Appliance. Both firms are headed by Wong Kwong-yu.

Mr Wong will personally retain a 35 per cent stake in Gome after the transaction with China Eagle, which has proposed changing its name to Gome Electrical Appliances Holding.

In February, Mr Wong raised his stake in China Eagle from 41 per cent to 66.5 per cent in an apparent attempt to qualify as a controlling shareholder and skirt the Hong Kong stock exchange's ban on back-door listings, which came into effect on April 1.

If a transaction does not effect a change in control - in this case Mr Wong's grip on China Eagle - it is not considered a back-door listing.

The acquisition by China Eagle, a small property and investment company  with a market capitalisation of   $420 million, values Gome at 13.5 billion yuan, or about 49 times the company's  earnings last year of 275 million yuan.

Mr Wong initially declined to answer questions about the deal.

However, in a later statement he said: 'The opportunity to acquire 65 per cent of Gome Appliance through this transaction is an exciting one. We are looking forward to benefiting from growth in the scale of Gome Appliance's operations.'

Mr Wong will receive  $243.5 million   of new China Eagle  shares and a two-tranche convertible note of  $8.05 billion  in exchange for his majority stake in Gome.  These shares are to be issued at  $5.52 after a 40-to-one consolidation, representing a 6.8 per cent discount to its last consolidated closing price of  $5.92.

The deal will allow Gome to tap the capital markets as it plans to aggressively expand its mainland retail network from 94  outlets   to 190 within two years.

The company  also wants to open 478 smaller audio-visual and mobile-phone shops by 2007.

In the first three months of this year, Gome made a profit of  84.53 million yuan  on sales of 2.91 billion yuan.

Gome, which sells audio and visual goods, refrigerators, air-conditioners, telecommunications products and computers, has  retail space amounting to  330,000 square metres across the mainland.

The company  wants to expand into second-tier cities by adding 26 outlets this year and 35 each in the following two years.

In April, Mr Wong told mainland media that Gome's ambition was to become  the mainland's largest audio-visual retail chain, with an annual sales target of 10 billion yuan and 20 per cent market share. He added that the company was prepared to spend 500 million yuan over five years on as many as 5,000 audio-visual outlets.

ABN Amro and Rothschilds are acting as  financial advisers for China Eagle, while Somerly was appointed as independent adviser for minority shareholders.

China Eagle has been suspended since May 24, when its shares last traded at 14.8  cents, and will resume trading today.



Gome moves closer to listing with 8.8b yuan takeover deal