Bain Capital Private Equity
Bain Capital Private Equity
Private Equity Bain Capital Invests in China’s GOME
Bain Capital LLC, a private equity firm based in Boston, recently closed a deal to invest as much as $420 million in Chinese electronics retailer, GOME Electrical Holdings Ltd. Bain Capital decided that it would settle the role of second largest shareholder in the company. The private equity group hopes to change GOME’s recent trend of declining revenues and profits. Other buyout firms competed for the prized stake, Kohlberg Kravis Roberts & Co. as well as Warburg Pincus tried for months.
There is an element of risk in this venture; Huang Guangyu, the founder and former chairman of GOME, was arrested in November accused of “economic crimes.” Importantly, Huang is the retains the largest stake in the company. He and his wife have a combined 35.6% stake in GOME. Although Huang was replaced as chairman by Chen Xiao, the biggest shareholder’s legal troubles add to the obstacles Bain Capital is facing.
Jonathon Zhu, Bain’s managing director leading the deal, gave an interview with the WSJ concerning the GOME deal. The following are excerpts relating to Huang’s trouble from the Q&A session but you can read the whole transcript here.
When did Bain identify GOME as an investment target?
“When news of GOME’s founder’s legal problems surfaced, we went and talked to Chen. The company was in a crisis mode, and needed to stabilize supplier and banker relationships. Shortly after, it thought about bringing in outside investors. We started a conversation in December 2008.”The investment carries some obvious risk given Huang’s legal trouble. What helped you get comfortable with it?
It’s certainly a hairy situation, and Huang’s legal problem is only part of the issue. The company’s corporate governance is sub-optimal, for instance. But there are a couple of things that give us confidence. For one, the potential upside to the deal is huge. It’s rare that one would have an opportunity to invest in a market leader in China with meaningful governance rights. For another, the company still has an opportunity to both expand and improve operations. Though it has about 1,300 stores, it hasn’t penetrated second-tier cities, and certainly hasn’t penetrated third- or fourth-tier cities. So there is an opportunity for new store expansion. Historically, GOME has focused on purchasing scale, and there is room for operational improvement such as cutting costs and improving customer service. Bain has plenty of expertise in retail and we hope to bring that to bear. We’ll get together with the management and outside consultants to identify areas to focus on initially.
Huang is still the largest shareholder of GOME. How do you go about running the company given the investigation of him?
We have not talked to Huang, and I don’t know how he thinks about our investment. We are not taking an adversary stance against Huang. He is a shareholder, and we are a shareholder, too. We hope he recognizes what we do and the value-enhancing capability we bring. He has already resigned from GOME, and is not expected to be involved in the company…
Bain Capital’s Orit Gadiesh wrote a great little book Lessons From Private Equity, click here to read my review.
Tags: private equity bain capital, Bain Capital LLC, Huang Guangyu, GOME Electronics Holding, Huang Guangyu GOME, Bain Capital Holdings, Bain Capital Buyout China
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Tags: Bain Capital Buyout China, Bain Capital Holdings, Bain Capital LLC, GOME Electronics Holding, Huang Guangyu, Huang Guangyu GOME, private equity bain capital
