China will soon have its biggest department store chain as a result of Shanghai Bailian Group's decision to merge its two department store chains into one listed unit.

The Shanghai Brilliance Group Co. Ltd. will be formed from the Shanghai No. 1 Department Store's absorption of the Shanghai Hualian Co., the firms said in separate statements published in the Shanghai Securities News.

The merger will create a retail giant with 14 department stores, three shopping malls and combined sales of 4.2 billion yuan (US$507 million).

Hualian will exchange 1 non-tradable share for 1.273 of Shanghai No. 1 Department Store's, the companies said.

The exchange ratio for the tradable shares will be 1:1.114.

Hualian will be delisted after the merger, which is an innovation in China's securities market.

Analysts have hailed the move as a trendsetter for future mergers between listed companies.

Sun Chao, an analyst from CITIC Securities said: "What's more important is the merger offers a prelude for Bailian to inject its assets into the market," Sun said.

Bailian, China's largest retailer, was set up last year through a combination of the parent companies of the Shanghai No. 1 Department Store, Hualian Department Store, Hualian and Lianhua Supermarket Co.

Market speculation is rife that Bailian is seeking a listing.

But Bailian President Zhang Xinsheng said listing of the company will be difficult to implement as the group has complicated investor relations.

Bailian now controls Hong Kong-listed Lianhua Supermarket Holdings and six subsidiaries in domestic markets, he said.

He said Bailian will inject further assets into the Brilliance Group.

The merger is expected to strengthen the firms and put them in a better position to ward off rivals as China prepares to lift restrictions on overseas retailers in order to meet its WTO obligations.

China will abolish joint-venture requirements and end restrictions on the location and number of foreign-funded stores before December 11.

Bailian is competing with larger international players, such as Wal-Mart and Carrefour, for a slice of Chinese retail sales, which climbed 9.1 per cent to 4.5 trillion yuan (US$540 billion) in 2003.

Bailian's sales rose 21.9 percent to 48.5 billion yuan (US$5.8 billion) last year, while the number of its outlets jumped by more than a quarter to 4,357, according to the Ministry of Commerce.

The No. 1 Department Store's net income soared 49 percent to 70 million yuan (US$8.46 million) last year, from 47 million yuan (US$5.68 million) in 2002. Sales edged down to 2.7 billion yuan (US$326 million) from 2.8 billion (US$338 million).

Hualian's net income fell 17 percent to 83.7 million yuan (US$10 million) from 101 million yuan (US$12.2 million), on sales that dropped to 1.5 billion yuan (US$181 million) from 2.4 billion yuan (US$290 million).

Trading in the two companies' shares has been suspended since Wednesday and will remain so until the deal is completed. Shanghai No. 1 closed up 3.5 percent at 9.3 yuan (US$1.12) per share on Tuesday, while Hualian finished up 4.5 percent at 9.5 yuan (US$1.15) per share.

Rumors that Bailian was planning to merge the two units had buoyed their share prices.

(China Daily April 9, 2004)