E-COMMERCE: Amazon Courts China’s Gome, Investment Coming?

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Bottom line: A new strategic partnership between Amazon and Chinese retailer Gome could expand later this year into an equity alliance that would see the former buy about a fifth of the latter for around $500 million.

Gome ties with Amazon

A year after getting dumped by private equity giant Bain, fading electronics retailer Gome (HKEx: 493) is being courted by yet another big western name, with word of a new major tie-up with global e-commerce leader Amazon (Nasdaq: AMZN). This particular tie-up is most intriguing due to the timing, which comes after reports emerged last year saying Gome’s controversial founder Huang Guangyu might soon be freed from prison after serving about half of a 14-year sentence for bribery and insider trading.

Reports of the early release, combined with a buyout of Bain’s 5 percent stake last year, hint that Huang may be making new plans for Gome if and when he emerges from prison soon. This new tie-up with Amazon suggests that a major investment from the US e-commerce giant could be in the offing, which could be part of Huang’s plan to breathe new life into his faded retailing empire.

Such a deal would also make sense for Amazon, for reasons that I’ll describe shortly. But that said, I would also caution Amazon to be careful in working with Gome, which has a history of corporate shenanigans that got Huang into the trouble in the first place. That trouble ultimately cost Huang his freedom and led to the decline of his electronics retailing chain that was once considered a leader in China.

All that said, let’s look at the latest headlines that say Amazon and Gome will enter into a broader strategic partnership that includes sharing of a wide range of resources, from supply chains to logistics and after-sales service. (Chinese article) The deal will also see Gome open a major storefront on Amazon’s China website.

The deal comes as Gome’s own website struggles for attention, and its older chain of more than 1,000 brick-and-mortar stores struggle in China’s rapidly changing retail climate. Those challenges led the company to report a profit decline on anemic revenue growth last year, though that performance marked an improvement over losses in previous years.

Gome has struggled for direction following Guang’s arrest and imprisonment in 2009. The company’s management tried to resuscitate Gome by selling 10 percent to Bain around the time of Guang’s original detention. Bain managed to return Gome to profitability, but the company’s failure to gain traction in e-commerce prevented it from building a solid foundation for the future. Huang reportedly never wanted Bain as a major partner for his company, and Bain ultimately sold off its remaining stake in Gome last year.

All that brings us to the present, where Huang and his wife control more than 90 percent of the company according to its latest annual report, leaving it with a thin share float in Hong Kong. That means Huang could easily engineer a stake sale to Amazon, and perhaps might be planning such a move if and when he emerges from prison soon as the reports indicated last year.

E-commerce Assistance

From Huang’s own perspective, bringing in Amazon as a major equity partner would give him e-commerce resources and expertise he desperately needs to compete with the likes of entrenched leaders Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD). But the deal also makes quite a bit of sense of Amazon, which has had difficulty cracking the China e-commerce market even after years and hundreds of millions of dollars of investment in the market.

Gome would offer its more than 1,000 brick-and-mortar stores as showrooms where Amazon customers could go and try out products, place orders and even pick up merchandise after placing orders online. Gome also offers a much more extensive logistics network through China, including warehouses and also specialist delivery and after-sales services teams. Such resources could become a potent weapon for Amazon in its bid to challenge Alibaba and JD.com.

Gome had a market value of about $2.5 billion based on Bain’s sale price last year, and the company’s latest share price puts its current value at about $3 billion. That would translate to a price of about $500 million for 20 percent of the company, which would be easily affordable for Amazon if it chose to form an equity alliance. Of course all of this is speculative, but the signs do seem to point to a potential bigger tie-up and I would peg the chances for formation of such an alliance between this pair at 50-50 or higher.

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