Talking Point

Takeover tussle

Wang looks for help as the fight to control Vanke turns hostile

Wang Shi w

When he was on top of the world: Wang Shi at Everest base camp – he now faces a takeover challenge

The Chinese economy of 1984 offered far fewer opportunities to the private sector than it does today. For the entrepreneurs starting out back then, it was all about the basics. And in the case of Wang Shi’s early career, that meant peddling animal feed to farmers.

Four years later he’d ventured into real estate and his property firm, China Vanke, hit a cash-crunch and needed to raise capital. So Wang went back to his roots, loading stacks of the company’s shares onto a bicycle to sell at a Shenzhen wet market. Vanke’s stock was flogged at Rmb1 apiece, alongside the rows of onions and cabbages.

Today Vanke is China’s top homebuilder, with a market value of Rmb260 billion ($40 billion.

But Wang and Vanke – which has seen its stock spike 80% in the past six months (and radically outperforming the benchmark index, which was down 12%) – now faces a new challenge, and one that is playing out in a slightly more developed stock market environment than he faced in 1988. This time he’s embroiled in China’s first major hostile takeover. And as Wang struggles to retain management control of the firm he founded, China’s financial sector is wondering who wants to take control of Vanke from him.

When did battle commence?

Investors began to sense a major fight was brewing in July last year when Vanke disclosed that a Qianhai-based insurer named Foresea Insurance had accumulated a 5% stake in the company. A unit of Shenzhen-based investment conglomerate Baoneng Group then joined the fray, snapping up Vanke shares aggressively in the secondary market. It was then revealed that Baoneng’s chairman Yao Zhenhua also controlled Foresea Insurance. By August, the two firms had unseated China Resources as Vanke’s biggest single shareholder. By early December the Baoneng consortium had raised its stake in Vanke to 24%, which at current market value is worth nearly $10 billion.

At first glance it looks as if an ambitious private-sector company – with seemingly deep pockets – is trying to outmuscle the state behemoth China Resources to control the country’s most iconic developer. Yet Vanke’s management hasn’t welcomed Baoneng’s eager attention. It suspended its Shenzhen-listed shares from trading on December 18, pending the announcement of a restructuring plan that’s expected before January 18 (if no further delay is sought).

In response to Baoneng’s campaign, Wang Shi has also come out of semi-retirement (local newspapers say the Vanke chairman is an avid outdoorsman, who has spent most of the past few years mountain climbing and studying at Harvard). “The reason for not welcoming Baoneng is simple: he [Yao Zhenhua] lacks credibility,” Wang was quoted as saying by Phoenix News. The homebuilder has warned that uncertainty over its ownership structure could undermine its credit ratings and long-term growth.

Chinese journalists have noted that, rather ironically, Yao also started his career as a Shenzhen vegetable vendor (though in his case in 1992).

Like Wang his ambitions soon expanded beyond the city’s wet markets and over the next 20 years Yao built an investment conglomerate with businesses spanning property, logistics, insurance and healthcare.

According to the CBN newspaper, the asset value of Baoneng’s property unit totals just Rmb47 billion, or less than a tenth of the assets of Vanke.

But the company has raised at least Rmb60 billion in debt this year to finance its investment plans. Nonetheless, a company of Vanke’s standing is unlikely to welcome such a highly leveraged buyout from a much smaller rival, CBN suggests.

Yao hit back at the speculation surrounding Baoneng’s share purchase campaign, pointing out that it is law-abiding and that he is a strong believer in “the power of the market”.

Why is Vanke a target?

Vanke has a better reputation than most developers for the quality of its property projects and generally reports some of the strongest sales as a result. But its ownership structure is also more fragmented than many of its peers, making it vulnerable to a raid. It was founded four years before Dalian Wanda, China’s biggest commercial landlord. But this four-year gap prompted a big difference in the financial fortunes of the two firms’ founders. While Wanda’s chairman Wang Jianlin is widely regarded as one of China’s richest tycoons, Wang Shi’s name rarely features in any wealth lists.

Why? Companies in China were owned by the state until 1984, when private firms were first allowed to emerge. Even after that reform, more cautious entrepreneurs, such as Liu Chuanzhi (who also founded Legend – parent of Lenovo – in 1984), typically granted controlling stakes to state entities in return for effective managerial control (see WiC291).

Likewise Wang opted to be the manager but not the majority owner at Vanke. “The wealth I created didn’t belong to me. I was only managing money for the country and the people,” he told a forum in Nanjing last year, adding that it was rather risky to get rich at a time “when people hated inequality more than poverty”.

Vanke’s earliest controlling shareholder was an investment firm belonging to the Shenzhen city government. Its stake was diluted because of numerous fundraisings over the years, including Vanke’s initial public offering in Shenzhen in 1991, when it became the first developer to list in China. As a result, its shareholding is highly fragmented. Today Wang and other top executives only own a combined 5% stake in the company.

This means that Vanke is a viable takeover target – indeed, it has been the subject of unwanted attention before. In 1994, several of Vanke’s shareholders led by Junan Securities (a predecessor firm of investment bank Guotai Junan) tabled a takeover bid to shareholders, offering to restructure Vanke’s businesses and oust Wang’s management team. On that occasion the top 10 shareholders in Vanke only owned a combined 23% stake. Even still, Wang won that battle, he says, by “talking the key members of the alliance out of the takeover attempt”.

Who might assist Vanke, then?

This time around the bidders may be more difficult to hold off, unless Wang can find more help, ideally from a state-backed partner. In the past he has enjoyed influential support, marrying the daughter of the former deputy Party boss of Guangdong. (He divorced in 2012, meeting his current girlfriend doing an MBA course.)

By the turn of the century – when Vanke was about to expand nationwide – he decided it was time to bring in another major shareholder that could give Vanke more financial firepower. He had two interested suitors. One was Sun Hung Kai Properties (SHKP), Hong Kong’s biggest property firm, and the other was China Resources, a state firm which was planning to increase its real estate portfolio.

Wang picked the latter. “We compared ourselves to SHKP. Vanke’s asset size was Rmb4.5 billion [in 1999] and that of SHKP was Rmb180 billion. If we chose SHKP we would have had to play second fiddle forever,” he later explained in his autobiography. In the restructuring that followed Vanke sold its shopping malls and shares equivalent to a 15% stake to China Resources. In the 15 years that followed China Resources remained Vanke’s single biggest shareholder – that is, until the emergence of Baoneng.

Who else is in the scrimmage?

Wang was unwilling to let a Hong Kong family-run company (SHKP) become its major shareholder. But China’s politically-connected clans would seem to be more welcome, especially if they can be called up as reinforcements against Baoneng.

Anbang Insurance, a private sector firm prone to even more acquisitive activity than Baoneng, has ccordingly been accumulating shares in Vanke, raising its stake from 4.5% to nearly 7% last month.

Anbang made international headlines after it acquired the Waldorf Astoria hotel in New York for $1.95 billion last year. It has also amassed a chunky stake in China Merchants Bank – which likewise exhibits a fragmented shareholding structure of its own (thus the speculation that Anbang plans a takeover, see WiC226).

Chinese media has previously reported that Anbang has the backing of a number of influential princelings. These include its chairman Wu Xiaohui, the grandson-in-law of Deng Xiaoping (albeit Wu and Deng’s descendant are divorced). Likewise Chen Xiaolu, a son of a respected military commander during the revolutionary period, is also on its board.

Despite some of the apparent similarities in investment ambition between Anbang and Baoneng, Vanke welcomed the former’s intervention with open arms. After it was revealed that Anbang had become the third biggest shareholder (behind Baoneng and China Resources), Vanke issued a statement celebrating the insurer’s purchases. Anbang echoed the sentiment with a bullish statement on Vanke’s prospects and vowed to cooperate on future projects.

A widely circulated online article gave its own spin as to the situation faced by Vanke. The anonymous piece, titled “Barbarians at the gate, Zhao family inside”, draws on a tale popularised by Lu Xun’s novella The True Story of Ah Q a century ago. Referencing Baoneng as the barbarian in the story (Wang has also labelled it as such), Anbang is portrayed as the “Zhao family”, a metaphor for a wealthy and well-connected ally.

The article goes on to speculate that many Chinese tycoons are puppets, or proxies, for politically-connected “Zhao families”. The author offers no solid evidence for the claim, but the description resonated with readers (the article got more than 100,000 hits on Sina in a few hours before being taken down by censors). The “Zhao family,” notes the New York Times, “has resurfaced as a disparaging term for China’s rich and politically well-connected.” (See our Q&A with Kroll’s China risk consultant here for more on this theme.)

So who is behind Baoneng?

An alternative view: it’s unlikely that Baoneng would be bothering to challenge the likes of China Resources and Anbang, had it not a “Zhao family” political insider supporting it too.

So far the media hasn’t mapped the connection between Baoneng and members of the political elite. In fact, no one is really sure where its war chest is coming from, although Caixin Weekly reports that the company obtains most of its financing through Zhejiang-based banks and wealth management products.

As for Anbang, it isn’t the only big spender on M&A from the insurance sector. Sino Life Insurance, the Economic Observer notes, has also spent at least Rmb45 billion this year buying shares in Pudong Development Bank, as well as a series of real estate assets. According to data from Wind Info, out of the 133 listed property firms in the A-share market, 23 have insurance firms among their top 10 shareholders. So perhaps the unsolicited bid for Vanke is a sign of similar fights to come. “Who wins this battle [to control Vanke] is not important to our society,” warns the outspoken property tycoon Ren Zhiqiang. “But it is crucial that, when we look back in five years time, we realise that all the interested parties kept to the rules.”

What is going to happen next?

Less is known about Baoneng’s Yao than Vanke’s Wang. In fact, the media has reported that during the decades during which he accumulated most of his wealth Yao steadily avoided interviews or appearances in wealth rankings, even paying firms to delete mentions of him online, rendering him almost invisible to Baidu’s search engine.

The fact that he now seems prepared to expose himself to the public eye is perhaps a measure of how seriously he wants Vanke.

Thus far he has demanded – and been refused – board seats by Wang. But now all eyes are on the Vanke founder showing his hand when his restructuring proposal gets announced on January 18. One way to fend off the hostile bid, according to a columnist at Wallstreet.cn, is for China Resources to inject its own property unit – the Hong Kong-listed China Resources Land – into Vanke. China Resources Land is currently worth nearly $20 billion. Vanke could pay for the acquisition by issuing new shares to China Resources. Such a move would massively dilute Baoneng’s stake.

Then again, there’s growing speculation that Baoneng and Anbang might even be acting in concert. Separately neither owns the 30% that would trigger a general offer for the developer. But were they to publicly join together that would force China Resources to consider its next move very carefully.

If China Resources is keen to hang onto its controlling stake – and do so without injecting its Hong Kong property unit – it could cough up to buy the Vanke shares purchased by Baoneng and Anbang. That would be expensive but there was a similar case in Hong Kong in 1987, when the long established trading firm Jardine Matheson faced a similar M&A dilemma. Back then a group of up-and-coming developers in Hong Kong launched a hostile bid for the British hong’s property jewel, Hongkong Land. To keep its control Jardine was forced to buy back their shares, leaving the local tycoons with a hefty profit.

The consortium that put together that bid was led by none other than Hong Kong’s richest businessman, Li Ka-shing.


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