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China's biggest home appliance retailer, Gome Electrical Appliance Holding Ltd, finalized its HK$5.27 billion (US$675.64 million) deal to acquire its rival China Paradise Electronics Retail Ltd yesterday, better positioning the firm to ward off foreign competition in the sector.

 

Gome agreed to pay HK$409 million (US$52.44 million) and one new share for every 3.08 shares in China Paradise, the company said at a press conference held last night.

 

The deal values China Paradise at HK$5.27 billion (US$680 million), which represents a 9 percent premium at China Paradise, based on the closing price of the two companies.

 

Gome Chairman Huang Guangyu, ranked China's richest businessman last year, will remain as chairman of the new company. Current China Paradise Chairman Chen Xiao will become the merged company's chief executive officer.

 

Huang will own 51.2 percent of the new company while Chen will hold a 12.5 percent stake.

 

China Paradise will continue to operate its Yolo brand after the deal, but the new company will consider combining some of the stores in the same areas in order to increase efficiency and reduce price battles, company officials said.

 

The move will create a retail giant with about US$8 billion in sales and a tenth of the Chinese consumer electronics market, which is luring an increasing number of foreign giants with deep pockets.

 

The US-based Best Buy Inc, the biggest consumer electronics chain in the United States, spent US$180 million to acquire fourth-ranked Jiangsu Five Star Appliance in May. And it opened its first mainland store in Shanghai last month.

 

"The deal will help us to strengthen our leading position in China's consumer electronics market and further expand our presence in the nation," said Huang.

 

The deal will enable Gome to tap into the lucrative Shanghai region market. Shanghai-based China Paradise now has 60 percent of the market in the nation's economic hub.

 

"The deal with Gome will not affect China Paradise's acquisition of Dazhong, which will be carried out later," said Chen.

 

China Paradise signed a cooperation agreement with Beijing-based Dazhong Group, which allowed it to acquire 78 percent of the latter within a year.

 

Dazhong, which owns 73 outlets in the nation's capital city, has a hold on more than 60 percent of the local market.

 

A Dazhong statement last night said that it will reconsider its cooperation agreement with China Paradise in light of the Gome-China Paradise merger, and it is willing to seek "possible tie-up" with relevant counterparts "at an appropriate time."

 

China's home appliance retailers have been expanding in recent years to achieve scale and squeeze better deals from manufacturers.

 

Gome, which held about 6 percent of the market in March, was planning to open 120 to 150 new stores in 2006.

 

In comparison, Suning, the sector's second-largest player, is now on the way to opening 1,500 stores in 350 cities by 2010.

 

However, the explosion of the sector has created overcrowding as increasingly fierce competition squeezes the profit margin for retailers.

 

According to Gome's first-quarter fiscal report, its net profit grew 21.7 percent, lagging far behind the growth of its sales income, which soared 67.8 percent in the same period.

 

(China Daily July 26, 2006)