Shares in Gome Electrical Appliances soared yesterday after emerging from a seven-month trading halt triggered by the arrest of its chairman and leading shareholder.
国美电器(Gome Electrical Appliances)股价昨日复牌后出现飙升。由于该公司董事长兼主要股东被捕，这只股票此前停牌了七个月。
Shares in China's biggest nationwide retailer closed up 69 per cent in a falling Hong Kong market after Bain Capital, the US private equity fund, was confirmed as its new strategic investor.
For the many stakeholders of the group, the surging stock price was a long overdue bit of good news.
The resurrection of Gome offers a study in how a troubled Chinese company managed to survive the disruption caused by the mysterious disappearance of its leading figure – and to re-emerge with at least $417m in fresh funding.
It sheds light on the calculated risks foreign private equity firms have to take in order to deploy capital in China, which has proved largely resistant to the buy-out kings.
Gome shares last traded on November 24 2008, the day a probe began into Huang Guangyu, the former chairman, who still holds a 36 per cent stake.
Mr Huang was detained by mainland authorities as part of an investigation into alleged share manipulation and illegal trading. His whereabouts remain unknown.
Gome has 1,300 outlets but had expanded too fast, with a focus on opening stores and not on profitability.
In the run-up to Mr Huang's arrest, the company's operations were being stung by rising credit costs and waning consumer demand.
In January, Chen Xiao succeeded Mr Huang as chairman and quickly enlisted the help of western accountants, bankers and public relations advisers.
Gome is among the few Hong Kong-listed mainland companies to boast genuinely independent non-executives, and a three-strong “special action committee” was established to examine whether the board was acting in the interests of all stakeholders.
Tom Manning, the head of the committee, described the outcome as a “triumph” from a corporate governance standpoint.
“Independent directors bring independent judgment in times of crisis”.
Mr Chen said Gome relied on the benevolence of vendors, suppliers and staff, and benefited from China's stimulus programme, which provided subsidies for energy-efficient appliances and boosted the property market.
Six months of discussions with private equity firms ended this month when Bain agreed to invest through a convertible bond and a rights issue. In return it gets a stake of about 20 per cent and to nominate three board members.
Private equity firms prefer “control” deals, and the terms of the Gome investment reflect the pragmatism required to successfully deploy capital in China.
But any such investment is fraught with risks.
Whether Mr Huang participates in the Gome rights issue – and few imagine he has access to the $100m or so required – he will remain the largest shareholder with a stake of at least 29 per cent.
It is unclear whether he welcomes the foreign investment.
There is no mechanism to resolve strategic disagreements between Mr Huang and Bain Capital, or clarity over his ability or desire to retain his Gome holding.
“It was hard enough for Bain to enter this investment, but imagine how much harder an exit could be,” said one private equity dealmaker.
Amid the platitudes at this week's unveiling of the deal, Jonathan Zhu, head of Bain Capital in China, insisted that his firm was comforted by the due diligence it had conducted.
“There are always risks in investing, and we are reasonably satisfied that the risk/reward outlook in the current scenario justifies this investment,” he said.
People familiar with the matter said Gome representatives had been in contact with Mr Huang and his associates, some of whom have power of attorney over his assets.
“Mr Huang can receive and send letters from his detention cell,” said one person.
“But these are read by authorities, and any exchange can take weeks.”
Gome's future rests on driving profitability and reform of its messy corporate structure.
The company, which is registered offshore, owns only 850 of the stores and manages the remainder, which are owned by Mr Huang through an onshore investment vehicle.
Unifying these arrangements could take years and test Bain's claim to be a long-term partner.