Qingdao-based Hisense has secured a 26.43 per cent stake in home appliance manufacturer Guangdong Kelon Electrical Holdings, and will pay 680 million (US$84.9 million), Kelon announced in a statement yesterday.

The price was adjusted from an initial 900 million (US$112.5 million) set last September, but Kelon's statement didn't explain the reasons for this.

Following the first payment of 500 million yuan (US$62.5 million), the stake transfer is likely to be finished before May 1. Upon completion of the deal, Hisense will become the largest shareholder in Kelon.

"The acquisition gives Hisense economies of scale in an industry where overcapacity has driven down prices," an analyst with CITIC Securities told China Daily. "Besides, Hisense wants to make a breakthrough in refrigerator and air-conditioner manufacturing, both of which are Kelon's strong points."

Hisense will more than double its annual production capacity of air conditioners to 7 million and boost its refrigerator capacity six-fold to 9.6 million, based on data on Hisense's website.

China produced 75 per cent of the world's household air conditioners and 30 per cent of refrigerators in 2004, according to the China Household Appliance Association.

Moreover, for Hisense, as a Shandong-based company, taking over Kelon could 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 refrigerator production lines.

Its total production capacity is far from enough, especially in South China.

Hisense will also become the only Chinese home appliance manufacturer with a presence in China's northern and southern markets.

Experts believe that Hisense will soon restructure its refrigerator and air conditioner production lines by combining all its relevant assets and marketing resources into "Kelon Electric."

Therefore, Hisense will boast two public companies handling black appliances (Hisense Electric) and white appliances (Kelon Electric).

As for brand management after the acquisition, Hisense said it would redesign Kelon's logo and make the new logo public on May 18.

Before the acquisition, Hisense injected 301 million yuan (US$37.6 million) into Kelon within a two-month period to resume Kelon's production and normalize its sales.

Thanks to these efforts, Kelon's sales didn't plummet after its crisis last year. Instead, it retained strong sales levels.

According to company statistics, Kelon sold 1.1 million refrigerators, 85,000 freezers and 750,000 air-conditioners last year.

Kelon was once one of China's most admired companies because of its smartly designed refrigerators but it has been struggling since last year.

The CSRC began to investigate Kelon in May 2005, after a 60-million-yuan (US$7.5 million) deficit in its 2004 annual report caused widespread suspicion. Its former chairman Gu Chujun and six other senior executives were arrested in September.

Hisense has been acting as Kelon's exclusive sales agent in China since last September.