Appliance maker seen getting ready for mass move to city life

Qingdao Haier Co's deal to sell 10 percent of itself to US buyout firm KKR & Co for $552 million will put China's dominant appliance-maker on track to reap a windfall from the country's push for urbanization, a KKR executive said.

In a release announcing the sale on Monday, KKR Greater China CEO David Liu said the private-equity company would assist the Shanghai-listed unit of Haier Group "in its next phase of growth by capitalizing on the opportunities created by China's continued urbanization and increasing consumer-income trend".

China is moving a quarter of a billion rural residents into newly built cities to boost domestic consumption and revive a slowing economy. The government's goal is to fully integrate 70 percent of the country's population, or roughly 900 million people, into city living by 2025.

That influx of rural residents into cities is expected to dramatically boost demand for many consumer items that Qingdao Haier makes and sells.

Under the agreement, Qingdao Haier will sell 299.5 million shares at 11.29 yuan ($1.84) each to New York-based KKR. The sale price represents a 15 percent discount to Qingdao Haier's price of 13.32 yuan on Sept 12, when its shares were suspended from trading. KKR also would get one of Qingdao Haier's nine board seats.

The transaction, which requires approval by China's Ministry of Commerce and the China Securities Regulatory Commission, would be KKR's largest-ever investment in China. Before Monday's deal was announced, its largest investment in China was a joint $990 million investment with TPG Capital in China International Capital in 2010.

The deal comes just days after KKR announced a $140 million joint venture with Chinese private-equity firm CDH Investments and China Modern Dairy Holdings Ltd to build two dairy farms. The private-equity firm recently raised a $6 billion pan-Asia fund and agreed to pay $1.7 billion for an 80 percent stake in Panasonic's health-care unit, its biggest deal ever in Japan.

The stake sale also will bring Qingdao Haier help in accelerating its "international expansion", Liu said. Although Haier Group has a leading 27.2 percent share of the appliance market in China, its global market share is a much smaller 9.6 percent, tying it with US rival Whirlpool Corp.

Qingdao Haier Vice-chairwoman Tan Lixia said KKR's "strong capital market expertise" and "deep" international merger-deal experience would help the Chinese company to "further grow its global platform".

In an effort to raise its global profile through acquisitions, Haier last year purchased a majority stake in New Zealand-based Fisher & Paykel Appliances Holdings Ltd for $768 million. It acquired Japan-based Sanyo Electric Co's household appliance unit a year earlier for $30 million. In 2004, in partnership with Bain Capital and Blackstone Group, it unsuccessfully bid for better-known US rival Maytag Corp, eventually losing to Michigan-based Whirlpool Corp.

Gwynn Guilford, a former hedge-fund analyst based in China, says Haier's push into developed markets is fueled by its desire to boost profit margins.

"Even as Haier has broken into global markets, its margins suggest that the bulk of those sales are in emerging markets like India or Pakistan, where prices are much lower than those in say, Canada," Guilford wrote in the online news site Quartz.

Boosting the company's brand profile overseas is vital because "wealthy consumers are unwilling to pay the same premiums for Haier that they shell out for Western and Japanese brands", Guilford wrote.

Acquisitions would bring Qingdao Haier new Western sales channels to tap and technology to adapt to its own products, Guilford wrote.

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(China Daily USA 10/02/2013 page1)