Buyout firm Carlyle Group agreed to buy 9 percent of Haier Electronics Group Co Ltd (HEG) through convertible bonds, raising its stake in a Chinese company expanding into Japan and China's untapped markets.

The deal comes days after Haier decided to buy Panasonic Corp's Sanyo Electric washing machine and refrigerator units in Japan and Southeast Asia for $130 million.

Carlyle said it will invest up to $194 million in HEG, a Hong Kong-listed subsidiary of white goods firm Haier Group, China's largest maker of washing machines and water heaters.

"It is a positive deal for the listed company as it secures a funding channel to finance its expansion," said Andrew To, head of research of Emperor Capital Group. "It is getting tougher to obtain financing in the mainland especially for a highly competitive market," he said.

Carlyle, which has invested more than $3 billion in China, was likely to have been attracted by the rapid growth in China's consumer driven industry, analysts said.

Carlyle will have a seat on the company's nine-member board.

 

Carlyle's deal follows U.S. private equity firm Kohlberg Kravis Roberts & Co's announcement on Monday to invest $114 million in China waste water treatment firm United Envirotech Ltd via convertible bond.

The advantage of a convertible bond for the company is it gets an immediate injection of capital, while the investor agrees to buy its stock at a higher price in the future. The investor receives a coupon from the bond until the strike price is hit, when it can call the bond and convert it to shares.

 

RAPID GROWTH

Similar to other home appliance makers, Haier faces challenges from rising labour, raw materials costs and intensifying competition from local and foreign brands.

Carlyle's investment will help Haier to fund its planned expansion into China's tier 3 and tier 4 cities, Carlyle said.

Patrick Yiu, a director at CASH Asset Management, said the rapid growth in China's consumer driven industry could be the main attraction for Carlyle.

"It is likely to be the industry prospect that attracted Carlyle to the company, an industry which is still has government support," said Yiu.

China has committed to expand domestic consumption and develop rural and Western areas under its 12th five-year plan, including building 36 million social housing units, which is expected to drive the home appliances market.

Carlyle will help Haier's expansion partly through its expertise in franchising and branding for retail operations, according to a source familiar with the matter.

"Carlyle is committed to investing in and growing together with China," Janine Feng, managing director of Carlyle Group said in a statement.

"Our investment in HEG complements China's next phase of development. We will support HEG's transformation to a service-oriented company that helps bridge the gap between the developed and underdeveloped markets," she added.

Haier is the world's number one retailer in washing machines, accounting for 9.1 percent of a global total of 113.46 million machines sold in 2010, according to Euromonitor. Haier's washing machines had 26.9 percent market share in 2010, according to China Market Monitor Co Limited.

Private equity firms usually built a put option into the bond structure to protect them against downside risk, according to an investment banker familiar with such deals.

However, existing investors are usually diluted, as the conversion is normally done through issue of new shares. That probably explains why Haier's shares fell 2.1 percent on Tuesday to end at HK$9.29 outpacing a 1.1 percent fall in the benchmark Hong Kong share index .

Trading in the stock was suspended on Monday pending an announcement.