Bear Stearns and GOME bet big on China retail

Bear Stearns and the founder of GOME create a $500 million fund to invest in growing businesses in China's retail sector.
US investment bank Bear Stearns and Eagle Investment Group, an investment company of the GOME group, have announced a strategic investment alliance to focus on opportunities in the retail sector in China.

Bear StearnsÆ private equity arm, Bear Stearns Merchant Banking (BSMB), will work with the 50:50 joint venture. Each partner will contribute $250 million of capital to the fund, which will be deployed in retail businesses in China, helping them to expand both domestically and beyond China. Bear Stearns representatives told press typical investment size would be in the $25 million-$100 million range and further capital raising could be considered, once the initial commitment is deployed.

Eagle Investment is a closely held company chaired by Wong Kwong Yu, founder of Hong Kong listed GOME Electrical Group. Wong is one of ChinaÆs richest men. He is self-made, having established GOME in 1987 and building it one of ChinaÆs largest electronics retailers. GOME is today the largest retail business listed on the Hong Kong Stock Exchange and a constituent of the MSCI China Index.

BSMB manages around $5 billion of funds. Since it was founded in 1997, it has invested in more than 50 companies including Aeropostale, BalducciÆs, New York & Company, Seven for All Mankind, Stuart Weitzman and Vitamin Shoppe Industries in the retail sector.

In April 2006, Wong sold $160 million of stock in GOME to meet free float requirements, reducing his stake in the company from 75.67% to 69.6%. The sale was well-timed, coinciding with a rally in the Hong Kong index to an all-time high. There was good appetite for the stock, illustrating that investors seem to share Wong's conviction that ChinaÆs retail sector is set to continue booming.

In July last year, Wong then merged China ParadiseÆs network of 205 stores into GOMEÆs 296 and created a leadership position in the retail sector. He has now committed to injecting the home appliance stores he owns into the listed entity by 2011.

ôBear Stearns Merchant Banking will contribute to EagleÆs success in Chinaö, says Wong, drawing attention to the combination of the US private equity firmÆs experience in the retail sector and his own retail China-centric experience. Wong told press he was bullish on opportunities in ChinaÆs second-tier cities and the rural market. He also clarified that the fund would not invest in GOME or in home electrical appliances companies.

China has become the worldÆs second largest economy in terms of purchasing power parity and is registering strong annual GDP growth. The countryÆs 1.3 billion strong population and growing purchasing power have made investors bullish on the retail sector. In February, Wal-Mart acquired the Trust-mart chain of 101 hypermarkets in a deal estimated to be worth $1 billion. Other international retailers investing in China include Carrefour, Auchan, Watson, Tesco and Metro.

But simultaneously, local entrepreneurs like Wong are waking up to the opportunities that lie beyond the obvious metros and big cities. A large percentage of China's population resides in the smaller towns and cities where the opportunity for organised retail is huge. If the retail experience of Bear Stearns and Eagle gives them a competitive edge in identifying who tomorrowÆs winners will be, the fund is set for success.
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