China's top home appliance retailer, Gome Electrical Appliances Holding Ltd, is to take over rival China Paradise Electronics Retail Ltd.
Shares in the two companies have suspended trading in the Hong Kong stock market, pending the release of a joint announcement.
Hong Kong Exchanges and Clearings Ltd said in a statement yesterday the joint announcement is "in relation to a possible merger, by way of a possible voluntary general offer by Gome for the shares in China Paradise."
"The two companies have reached a merger agreement," a source close to Gome told China Daily, refusing to reveal further details.
Gome is expected to offer about one share for every three shares in China Paradise.
Gome spokesman He Yangqing refused to comment, saying an announcement, pending approval from Hong Kong Exchanges and Clearings Ltd, will be released shortly.
"The takeover will be much larger than US retailer Best Buy's US$180 million for China's fourth largest home appliance retailer Five Star," said Sun Luan, a retail analyst with China Securities.
Gome's market value is currently about HK$14 billion (US$1.79 billion), while China Paradise is worth about HK$5 billion (US$641 million).
Sources said the merger is a result of the dilemma raised by cooperation between China Paradise and Beijing Dazhong, the country's fifth biggest electronics retailer.
In April, China Paradise and Dazhong signed a cooperation deal, agreeing a merger through share displacement within a year.
The deal has run into difficulty, however. Under it, Dazhong has a right to a guaranteed 150 million yuan (US$18.75 million) from China Paradise, if the latter can not fulfill its obligations.
While Dazhong will pay 300 million yuan (US$37.5 million) to China Paradise, if it fails to carry out its obligations.
This means when either of the two companies proposes ending the deal, it will suffer huge losses.
The merger between China Paradise and Gome will help solve the problem, as Gome will take over Dazhong as well.
"The merger will create a retail giant and will change China's market structure," said Sun Luan from China Securities.
According to her, other players like Suning and Best Buy will now find themselves in a disadvantageous position, when negotiating with suppliers.
At present, Suning, China's No 2 home appliance retailer, has some 350 outlets, with annual sales of over 30 billion yuan (US$3.75 billion).
Best Buy, after acquiring Five Star, has nearly 200 outlets and annual sales of 15 billion yuan (US$1.87 billion).
While Gome, China Paradise and Dazhong have a combined 800 stores and combined sales of 80 billion yuan (US$10 billion) a year.
But, "it takes time for business integration and there will be no imminent impact on the market," said Sun.
"The businesses' integration, during which some stores may close, will offer some opportunities for us," said a Suning official, who declined to be named.
Five Star's spokeswoman also said the company didn't feel immediate pressure from the merger.
(China Daily July 19, 2006)