Stock-laced offer for China Paradise comes as target firm slumps and competition hits industry margins
Gome Electrical Appliances Holding offered to pay about $4.9 billion, much or all of it in stock, for third-ranked China Paradise Electronics Retail in a bid to boost falling margins and consolidate its position as the country's largest home appliance retailer, sources familiar with the deal said.
Beijing-based Gome is offering about one share for every three of Shanghai-based China Paradise, taking advantage of a slump in China Paradise stock, the sources said. A share placement in April that included stock held by big institutional investors in China Paradise, including Morgan Stanley's private equity arm, triggered the most recent share slide.
China Paradise shares last traded on Monday before being suspended at $2.05, above a record low of $1.82 reached on June 21 and down almost 10 per cent from their initial public offering price of $2.25 in October last year.
Gome shares last traded on Monday at $6.35 before being suspended. The offer would pay China Paradise shareholders a small premium of about 3.25 per cent.
Fierce local competition, made worse by the entry of aggressive foreign retailers, including Best Buy of the United States, into the mainland market, has shrunk profit margins in the industry.
While Gome's net profit rose 20 per cent to 96.62 million yuan for the three months ended March 31, its net margin fell 1.04 percentage point year on year to 2.74 per cent. Sales per square metre slumped 28 per cent to about 21,600 yuan on an annualised basis.