The battle for Gome turns personal
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Refrigerators and air conditioners may not seem like the stuff of high drama, but sales of home appliances form the backdrop of a riveting corporate soap opera pitting the management of electrical retail giant Gome against its disgraced founder and former Chairman Huang Guangyu.
Investors, however, may not be so entertained by the uncertainty stirred from this very public tug-of-war. They are wondering what it will mean to Gome's bottom line and how it will affect Gome's competition with chief rival Suning Appliance Co.
The disagreement, if it can politely be called that, surfaced at the annual general meeting in May when Huang opposed the appointment of three non-executive directors from Bain Capital. The Gome board of directors overturned his decision. The gloves came off and the public blood-letting began.
On August 5, Gome said it would file a lawsuit against Huang, seeking compensation in connection with breach of duties related to the repurchases of the company's shares in 2008.
Huang, once the richest man on the Chinese mainland, was sentenced to 14 years in jail this year on bribery and insider trading charges. A jail cell hasn't stopped his crusade to hang on to the empire that catapulted him to fame and fortune.
He is still Gome's largest shareholder, with a 34 percent stake held through his wholly owned Shining Crown Holdings. Huang has demanded the ouster of current Gome Chairman Chen Xiao and has sought to overturn authorization for the board to issue up to 20 percent in new shares, which would dilute his holding.
The board and Huang - through Shining Crown - have both published open letters seeking support from Gome employees and smaller shareholders.
In the letters, Huang accused Chairman Chen of attempting to steal Gome from its founder while the former boss is battling the biggest crisis of his business life. Huang also lambasted Chen for trying to sell out to United States-based Bain Capital and for losing market share to Suning.
There is an old saying that it's an ill bird that fouls its own nest.
However, neither side has taken great pains to keep the dispute away from the public limelight. Both are appealing for support from smaller shareholders ahead of a special meeting of shareholders scheduled on September 28.
In the showdown to come, Chen holds 1.47 percent of Gome shares, while Bain Capital, which backs Chen, owns Gome convertible bonds that represent about 9 percent of shares. Bain is expected to convert the bonds into shares before the meeting, Chen disclosed earlier this week.
Among Gome's nearly 180 institutional investors, the 50 largest ones control about a combined 40 percent of the company.
In order to secure a majority vote, the disadvantaged Chen is reportedly planning to issue shares equivalent to about 20 percent of outstanding stock. That sale and the conversion of Bain debt would dilute Huang's stake to less than 29.8 percent.
"The current management team is more likely to win, though a few smaller shareholders stood with the biggest shareholder to vote against the Bain directors at the annual general meeting held in May," said Julie Ke, a Hong Kong-based analyst at Guotai Jun'an Securities Co.
Gome is listed in Hong Kong, which has elevated the dispute to an offshore audience.
The current board rests its case on the fact that Gome's fortunes took a nosedive when Huang was detained by authorities at the end of 2008, and the company's profitability has greatly improved under Chen's chairmanship.
Sales at Gome dived to 9.5 billion yuan (US$1.4 billion) in the fourth quarter of 2008, then slowly revived to a record high of 13 billion yuan in the second quarter of this year. First-half profit also jumped 66 percent from a year earlier to 962 million yuan after improvements in the company's sales network were implemented.
The company's stock price rose from a low of HK$1.12 (14 US cents) in November 2008 to HK$2.34 on August 25.
However good the figures look, Huang shows no signs of throwing in the towel. He has suggested his sister be given a board seat to maintain the "family interest" in the company.
There are still people who think Gome is a testament to Huang's hard work and enterprise and who believe that no one is entitled to yank the empire away from him.
"Despite some mistakes Huang has made, he made a substantial contribution to the company," Hu Yuanqiang, an industry watcher who follows the stock market, wrote in his blog. "Without a shadow of a doubt, he has the capability to make Gome bigger just as he once built it into China's top electrical appliance retailer."
Suning has benefited from its rival's woes and now has elbowed Gome aside to take top spot in the electrical appliances retailing market. That's a weak chink in Chen's armor.
By the end of June, Gome had 740 stores nationwide, after closing more than 150 under-performing outlets since last year. At the same time, Suning added 149 outlets this year to boost its number to 1,075. Just three years ago, Gome outlets outnumbered Suning's 726 to 632.
Suning has also surpassed Gome in the profit column. Suning reported first-half earnings of 1.97 billion yuan, nearly three times Gome's earnings.
Industry analysts said China's electrical appliances market is far from saturated, and there's plenty of room for expansion across a country where rural consumption is expected to play a larger role.
According to the China Chain Store and Franchise Association, China's home appliances market rose 8 percent in 2009, with growth in regional chains elbowing out market share gains by either Suning or Gome.
In other words, the areas Gome gave up as part of its consolidation last year may be quickly snapped up by smaller competitors.
Which will shareholders choose? Short-term profits or long-term growth opportunities?
While everyone sits and waits on the outcome, Huang is reportedly trying to raise funds to increase his stake in Gome and has tried to approach institutional investors for support. At present he needs to sway only 16 percent of shareholders, while Chen needs backing from more than 40 percent.
Since the battle started, Gome's stock plunged 14.3 percent to HK$2.34 on August 25, while Suning shares in Shenzhen rose 14.9 percent to 14.48 yuan in the same period.
