Credit Suisse identified the target and advised Best Buy on the deal.
Jiangsu Five Star sells consumer electronics and home appliances such as air conditioners, TVs and white goods. The company had sales of $700 million in 2005 and has 12,000 employees. A source close to the deal indicated the company was "very profitable". Between 2004 and 2008, the overall compound annual growth rate in terms of sales of the sector in China was 11%.
Under the terms of the deal, Best Buy will immediately take a majority stake in the company for $180 million. The sale comprises a mixture of new and old shares, so as to give the management team an immediate kicker while providing the company with expansion capital, according to one specialist.
Pre-transaction, founder and chairman Wang Jianguo, owned 32%; other senior management owned 28.1% and middle management owned 18.6% of the company.
ôAn IPO was also on the cards, but the companyÆs management decided to go for the trade sale,ö says a specialist close to the deal. Indeed, Best Buy seduced the company away from a private equity player which was sniffing around the Nanjing-based company.
According to one private equity player, the move makes sense for Five Star. ôThey will be using $122 million to fund the companyÆs expansion, and getting all the expertise in marketing, management and product-development which Best Buy can provide. ThatÆs far more advantageous strategically for the company than an IPO,ö he says.
Five Star, which was founded in 1998 was and bought out by the management in 2000, is facing increasingly hot competition in the white good market. Most dangerous is Hong Kong-listed, privately-owned Gome, owned by one of the richest men in China, and which has a nationwide presence thanks to its first mover advantage.
ôGome is the way Five Star has to go û they must expand nationally. Currently, they only have a local presence in Zhejiang and Jiangsu provinces. But such an expansion takes time and money, which is why getting a buy-in by a world-class strategic investor is important,ö says a specialist, adding that the key point was identifying and acquiring premium retail store space. Gome has even set up a flagship store in Five Star's core market of Nanjing.
For Best Buy, buying into a growing, profitable company also has advantages, given Best Buy's presence in China is currently restricted to an office in Shanghai. Acquiring Jiangsu Five Star and its 134 retail stores gives it an immediate and significant presence in China.
It appears as if Best Buy genuinely wants to keep Five StarÆs management, given the structure of the deal, which is structured in two steps. After an agreed period, Best Buy is to acquire the managementÆs remaining minority stake in the company, but at a price in accordance with the management meeting performance targets.
ôThe deal is a way for Best Buy to dip a toe into the Chinese market, while leaving the heavy lifting to the locals û at least until they have gained the necessary experience to take over,ö comments one observer.
Best Buy, which so far only has an office in Shanghai, is to keep the Jiangsu Five Star brand, at least temporarily.
The Chinese private equity market has been characterised by a preference for IPOs over trade sales. Some specialists believe this is due to Chinese entrepreneursÆ obsession with keeping and growing their assets, rather than flipping them at the first opportunity. Another consideration is that entrepreneurs can use an IPO to grow the company to a size where if they must sell to a larger rival, they can receive a much higher return.
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