Corporate scandals. Dubious dealings. Plunging sales. Millions reportedly embezzled. And to top it all, the chairman under arrest.

Sounds like the kind of company you would not like to keep.

On the flip side though, the company is a household brand with quality products.

So, perhaps it should come as no surprise that a good many investors are lining up to take control of crisis-ridden Kelon, the renowned maker of refrigerators and air-conditioners.

About a dozen leading electrical appliance firms from home and from abroad including Hisense, Midea and Electrolux are queuing up to take over Kelon.

"It is really a good buy," Dong Chen, an analyst with China Securities, tells China Business Weekly. "Its brand name and marketing channels are particularly attractive to potential buyers, especially in the electrical-appliance industry where competition is red-hot. "

More importantly, Kelon fell into dire straits not because of its product line or marketing skills but because of its controversial chairman, Gu Chujun, who was detained last week for economic problems. Two top managers, Yan Yousong and Jiang Yuan are also being held.

Dong says: "Kelon is a good company, but it chose a bad investor."

After Gu acquired 26.43 per cent of Kelon to become its controlling shareholder in 2001, he allegedly began to embezzle Kelon's capital to fuel his merger-and-acquisition spree, resulting in a cash drain and production setbacks.

According to Dong, potential domestic and overseas buyers want Kelon for different reasons.

"For domestic investors, Kelon's brand image, its strong research and development capacity and market share are most appealing; while foreign investors are more interested in Kelon's production capacity, quality-control system and marketing channels," Dong explains.

A closer look at one of the potential buyers reveals what's attractive about Kelon.

According to Shanghai Securities News, Hisense has offered 1.1 billion yuan (US$136 million) to acquire about a quarter of Kelon's shares that are owned by Gu-controlled Greencool. That is a good price, experts say.

Greencool, Kelon's largest shareholder, has a 26.43 per cent stake in Kelon, with 262 million shares.

Kelon's A share traded on Thursday at 1.94 yuan (24 US cents) by the end of last week. This means Greencool has 508 million yuan (US$62.7 million) worth of Kelon shares, much lower than Hisense's bidding price.

A top manager at Hisense says there are various reasons for the high price.

"Hisense wants to make a breakthrough in refrigerator and air-conditioning manufacturing - both of which are Kelon's strong points," he was quoted by Shanghai Securities News as saying. "Besides, Kelon is a household name and has quality assets."

Moreover, for Hisense as a Shangdong-based company taking over Kelon can strengthen its presence in South China.

Hisense, which started out as a maker of black goods such as TV sets, has recently turned its attention to the white-goods business. However, it has only two air-conditioner production lines in Qingdao, East China's Shandong Province; and Huzhou, East China's Zheijiang Province.

After its acquisition of Beijing Xuehua Refrigerator and Nanjing Bole Refrigerator in the past two years, it owns two production lines but all in North China. But its total production capacity is far from enough, especially in South China.

"If Hisense takes over Kelon's large-scale production line in Guangdong and capitalize on its purchase, distribution and export strengths, Hisense's white goods will become China leaders in no time," Zhu Shuqin, director of Hisense brand marketing department, tells China Business Weekly.

Other investors are thinking along the same lines: although Kelon's cash flow is drained for the moment, its brand name and production base are intact, which is worth the risk.

"Kelon must be restructured to benefit shareholders, the local government and banks," an analyst, who prefers to be anonymous, tells China Business Weekly. "But the buyer must be cash-rich."

His remarks make sense as large sum of money is needed to repay debts and restart full production.

Although the China Securities Regulatory Commission (CSRC), the industry watchdog, says it believes Gu Chujun has violated the securities law, including inflating profits and capital embezzlement, the amount of Kelon's debt remains a mystery - and that makes some potential buyers wary.

"We will make no rash move before the debt issue is clear," says Wang Xiaoming, spokesman of Midea.

Meanwhile, post-acquisition management will be not easy because the buyer will face the same problem Gu did in 2001: how to turn around loss-making Kelon as soon as possible.

And then there is the matter of branding: how to integrate Kelon's brand with its brands.

To boost investor confidence, it should be careful in choosing the new management team.

"There must be an efficient management team rather than an autocratic chairman leading the enterprise," says the anonymous analyst. "And an efficient team usually consists of talents with diverse expertise and experience, which can help avoid 'group think'."

Most urgently, the buyer needs to win the support of banks, some of which have suspended credit lines and are pressing for repayment.

For Kelon, the pressing problem is to restore its relationship with suppliers and franchisers, crank up production and clear its balance sheet.

"Winning the support of suppliers and franchisers is critical for Kelon's survival," says Xue Hui, vice president of Meiling Electrical Appliances.

Suppliers have suspended shipments and are demanding payment due, which is "troubling," says Xue.

"And some franchisers have stopped orders fearing that Kelon may not be able to deliver, which could be fatal to Kelon."

A top manager at Kelon discloses that a good many suppliers and franchisers have stopped dealing with Kelon after the CSRC launched an investigation into Kelon in April.

Kelon's sales dropped 48 per cent in May and plummeted 70 per cent in June.

Well aware of the importance of suppliers and franchisers, Liu Congmeng, who is responsible for Kelon's day-to-day running for the moment, is negotiating with them - and may have had some success.

According to Shanghai Securities News, Kelon recently received an overseas order valued about US$2 million; and suppliers are willing to ship raw materials on cash terms.

"Although the overseas order is not very big, it is an optimistic sign," a manager was quoted as saying by the newspaper.

According to Liu Weixiang, a Kelon spokesman, the company is expected to resume full production in a week.

(China Daily 08/08/2005 page1)