First Natural Foods Holdings plans to raise HK$116 million for expansion by selling a convertible note to a United States hedge fund firm. The deal could potentially make DKR SoundShore Oasis Holding Fund the second-largest shareholder in the mainland frozen-foods processor. Under the deal, the main board company agreed to sell to the fund a 3 per cent convertible note that can be changed into up to 12.9 per cent of the company's enlarged share capital at 85 HK cents each when the note matures in five years. The conversion price represents a premium of 4.94 per cent to the company's close of 81 HK cents on August 11, the last trading day before its shares were suspended. To facilitate the deal, First Natural Foods, which earned 113 million yuan last year, will issue up to 136.47 million new shares. If fully converted, the note will make DKR SoundShore the largest shareholder of the Fujian-based firm after chairman Yeung Chung-lung, whose stake will be diluted to 34.8 per cent from 39.9 per cent. Cheah Cheng Hye, the chairman of Hong Kong fund Value Partners, is the company's second-largest shareholder, with a 7 per cent stake. 'With the expansion of the food industry in China, it is essential and beneficial for the company to secure additional funds for expansion as and when opportunities arise,' Mr Yeung said in a statement yesterday. He said the HK$112 million net proceeds from the note issue would be used to expand its sales and distribution network, including up to 60 million yuan to set up 20 retail stores and three distribution centres in Beijing, Shanghai and Xian by August next year. A further 30 million yuan to 50 million yuan would be used to establish about 15 retail stores and three distribution centres in Ningxia, Chengdu and Chongqing by June 2008. Quam Securities is the arranger of the convertible note. Shares of First Natural Foods fell 4.93 per cent to close at 77 HK cents yesterday after being suspended from trading for two days before the announcement. The stock has surged 70.53 per cent this year.