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TPG and Legend Holdings buy stake in Chinese retailer Wumart

Private equity firm Texas Pacific Group and China's Legend Holdings have agreed to invest $213 million for an 11% stake in Hong Kong-listed Wumart Stores.

Private equity firm Texas Pacific Group and China's Legend Holdings will invest $213 million for an 11% stake in Hong Kong-listed Chinese retail chain Wumart Stores.

Both investors are buying a combination of H-shares and domestic shares. TPG will route the investment through TPG Asia. Legend Holdings is a Chinese investment company which owns a controlling interest in Chinese computer firm Lenovo. Legend is routing its investment through investment companies Hony Capital and Fit Sports.

Wumart is raising HK$1.1 billion ($141.9 million) through the issue of H-shares. TPG is buying 84.5 million worth of H-shares for HK$930 million. TPG will own a 6.17% stake in the fully enlarged capital of Wumart, post both the H-share and domestic share issues. Legend is buying 15.4 million H-shares, representing a 1.13% stake, for HK$170 million.

Both investors are buying the H-shares at a price of HK$11 per share. The agreed price is a discount of 9.84% to the last traded price yesterday before the announcement was issued and a discount of 7.06% to the average closing price for the last five trading days before the deal was announced.

Wumart is raising another Rmb485 million ($71 million) through an issue of domestic shares. TPG is investing Rmb384 million in domestic shares for a 3.03% stake in Wumart, while Legend is investing Rmb79 million for a 0.62% stake. The domestic shares are priced at Rmb9.26 per share, a 14% discount to the price at which the H-shares traded yesterday and an 11.3% discount to the average closing price for the last five trading days before the deal was announced. TPG and Legend are also paying Wumart an arrangement fee of Rmb0.44 per share, making the effective price to the investors Rmb9.70.

Wumart and the investors have agreed that within three years from the date of issue they will seek to have the domestic shares listed on either the Shanghai or Shenzhen Stock Exchange. In case such a listing does not take place or if there is a change of controlling shareholder of Wumart, the investors have the right to put their shares to the Wumart owner at a price which is a 7.46% discount to the weighted average closing price of the H-shares for the last five trading days before the investors exercise their put.

The investors are subject to a 12-month lock-up period on both the H-shares and domestic shares.

TPG and Legend have the right to nominate one director each to the board of Wumart. Wumart has also agreed that either the TPG or the Legend nominee will be a member of: the remuneration committee of Wumart; the audit committee; a newly established M&A committee; and a new budget committee. In each instance the investors have stipulated how many other members should be on the committee and whether they should be executive directors or independent, non-executive directors.

Wumart said in its Hong Kong Exchange filing yesterday that it would use the money raised to fund expansion of its store network as well as for acquisitions.

Wumart had a network of 424 stores as of June 30, comprising 107 superstores and 317 mini-marts. Wumart directly owns 101 superstores in Beijing, Tianjin and Zhejiang. It owns 204 mini-marts while franchisees operate another 75 in Beijing and Zhejiang. In addition, Wumart has management agreements for 6 superstores in Hebei and Tianjin and 38 mini-marts in Tianjin.

Wumart revenues for the six months to June 30 were Rmb5.7 billion, a growth of 23% over the first six months of 2008. Wumart's gross profit was Rmb1.1 billion, up 35% over the corresponding period of 2008.

Yesterday's investment in Wumart is TPG's second investment in China's retail sector within just a few months and indicates the private equity firm's bullishness on the sector. In May TPG paid $80 million for convertible bonds with warrants in Daphne International, a shoe retailer with around 3,000 outlets in China and Taiwan. After the bonds convert and if it exercises the warrants, TPG could own up to 14.5% in Hong Kong-listed Daphne.

Wumart is advised by Credit Suisse. TPG did not work with an adviser.

Wumart's shares gained 4.4% on the HKEx yesterday to close at HK$11.96.

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