Banking & Finance

Card withdrawal

Shareholder exit puts valuation on UnionPay


“Buffett Investment? It’s not me”

Warren Buffett’s disdain for credit card debt is well known. But that is not to say he has the same dislike of the companies that offer the cards themselves.

Berkshire Hathaway began buying into American Express in 1964 and it has remained one of Buffett’s top-four holdings ever since. His 13.7% stake in Amex is now worth around $12 billion.

In China of late, a certain ‘Buffett Investment Company’ has been trying to offload a stake in a card business – more specifically in UnionPay, a bank card association through which the overwhelming majority of China’s credit card transactions are processed (see WiC64).

What does the Sage of Omaha have to do with UnionPay? The answer is nothing – Buffett Investment is a Wenzhou-based firm owned by private entrepreneurs. Buffett may not even be aware that these individuals are trading off the Chinese translation of his name, ‘Bafeite’.

While Berkshire Hathaway invests in a wide array of industries, Buffett Investment focuses mainly on financial firms and real estate projects. In a notice placed with the Shanghai United Assets and Equity Exchange, a marketplace for financial assets, Buffett Investment has put a 0.17% stake in UnionPay on the auction block. It is asking for a minimum price of Rmb107 million ($17 million). If transacted, the disposal would give UnionPay a Rmb63 billion valuation.

Ths is the second time in three years that the Wenzhou firm has tried to offload its UnionPay investment. Its first try in 2011 – at a slightly higher asking price – resulted in no bidders. Citing insiders, the 21CN Business Herald says another private-sector firm has expressed interest this time. But it remains uncertain if regulators will endorse the transaction due to UnionPay’s “very special nature”, 21CN believes.

Why is UnionPay so special? It is a strategic asset, reckons the China Securities Journal, because it can tap the credit profiles of almost every Chinese consumer.

UnionPay got its start in 2002 when 18 state-owned bankcard centres were combined into a single entity. The consolidation saw the top five state lenders plus the China Banknote Printing and Minting Corp (a unit of the central bank) each get a 5.45% slice. Nine smaller national banks shared another 33% stake. The remainder was scattered around 69 regional lenders and credit unions.

The shareholding structure evolved when UnionPay raised fresh equity after 2008. About 60 private-sector firms – including Buffett Investment – bought in, now controlling around 15%. What they own is one of China’s most exciting pieces of financial infrastructure. By late 2012, Bloomberg said UnionPay already had “more plastic in circulation than any other payment network” and, as WiC has reported previously, it is now vying for Visa’s number one spot in global credit card spending volume. According to China Business News, UnionPay made more than Rmb1 billion in net profit in 2011, a number that continues to grow strongly.

So why is Buffett Investment looking to exit? It’s not entirely clear but many Wenzhou entrepreneurs have been struggling with a liquidity crunch. CBN says that another reason is that shareholders might soon need to make a “massive capital injection” to fund further growth overseas, as well as improve its payment systems at home in the face of competition from rivals such as Alibaba’s Alipay.

To avoid being diluted, Buffett Investment will need to stump up more cash. It may be reluctant to do so, especially as CBN adds that UnionPay has become “meaner” with its dividend payouts.

What most of these private equity shareholders were hoping for was a proper listing, so that they could cash out with a lucrative profit. But National Business Daily reports that UnionPay management told shareholders in May that “an imminent listing is unlikely”.

That leaves Buffett Investment with a much trickier exit. 21CN said UnionPay has strict clauses that prevent shareholders from selling to any entity construed to be a domestic competitor, as well as other restrictions that heavily discourage a sale to foreign buyers.

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