A man walks past a GOME store in Shanghai, Aug. 26, 2013. (Photo : REUTERS)
Electronics retail giant Gome Electrical Appliances Holding Ltd. has announced plans to purchase its sister company Artway Development Ltd,, in a move seen by analysts as a consolidation of power of its founder Huang Guangyu, who is currently jailed over bribery charges.
Gome, which is China's second biggest electronics retailer, said on Sunday that it signed an agreement to purchase Artway for HK$11.3 billion ($1.46 billion) from Gome Management Ltd. Artway, which markets electrical appliances under the Gome brand name, is wholly owned by Huang.
Gome shares, which had been suspended on July 20, dropped 13 percent by the close of trading in Hong Kong to HK$1.27, the lowest level since July 8. Its bigger competitor Suning Commerce Group Co. closed down 10 percent in Shenzhen, while the Hang Seng Index fell by 3.1 percent.
The cost of the acquisition is too high, and its synergy effect is unclear, said Huang Yaoxin and Guo Haiyan, analysts at China International Capital Corp., in a note published on Monday. Both analysts, who maintained a sell rating on the stock, noted that the deal is not expected to lead into any meaningful changes, as Gome already provides purchasing and management services to Artway.
As part of the deal, Gome will issue Gome Management Ltd. with 6.2 billion new shares and 2.5 billion warrants that can be converted into new shares, the company said. The issuance will increase the Gome stake held by Huang and his associates by as much as 55.3 percent from the current 32.4 percent.
"The acquisition simplifies the management and financial structure of all Gome stores, which paves the way for Huang's takeover upon his potential return," Anita Chu, an analyst at Bank of Communications Co., wrote on Monday.
Huang, who was sentenced to 14 years in prison for bribery and insider trading, reportedly forced the resignation of Gome's former chairman in 2011 to reassert influence over the board.
He may face opposition from shareholders on the latest deal as it would dilute Gome's earnings, said Alfred Or, an analyst at Qilu International Holdings Ltd.
"I think at this stage, the shareholders will object to the deal most probably," he said. "If the deal is accepted, the share price will drop because it will lose part of the revenues and earnings due to consolidation."
According to Bloomberg data, 4.7 percent of Gome is controlled by BlackRock Inc. through several portfolios, while Morgan Stanley holds 3.8 percent and UBS AG funds have 3 percent.
In a statement, Gome said that an application will be made to Hong Kong regulators for a so-called "whitewash waiver," which seeks to exempt Huang and Gome Management Ltd. from issuing a mandatory general offer for the shares they do not already own.
The waiver, if granted, would be subject to the approval of Gome's independent shareholders, the filing said.
