The longest day

Why China Resources says no to Vanke for the first time in over 15 years

Vanke's Chairman Wang Shi attends the debut of his company at the Hong Kong Stock Exchange

Wang: metro deal derailed?

For more than a decade China Vanke’s boardroom has been hailed as the place that showcases the most cordial corporate governance in China. The Shenzhen developer brought in China Resources as its biggest shareholder in 1999. The state giant has remained a passive investor since, giving Vanke’s founder Wang Shi and his executives the managerial control they desired of China’s biggest and most iconic property firm. In fact, according to the Xinhua-run China Financial Weekly, China Resources has never said no to any decision made by Vanke’s professional managers over the years.

This amicable relationship has been put under pressure since December, however, when a little-known property developer and insurance firm called Baoneng quietly amassed a stake of more than 24% in Vanke, thus overtaking China Resources as Vanke’s biggest shareholder (see WiC308). And the relationship finally cracked last week when Vanke’s board of directors voted on a decision that would have further relegated China Resources’ position to merely the third biggest shareholder.

The board meeting was scheduled to vote on a plan to counter Baoneng’s advance. The proposal was announced back in March, as Vanke signed a memorandum of understanding with Shenzhen Metro Group, a state firm controlled by the Shenzhen government (China Resources, meanwhile, is a central-government-owned enterprise directly under the State Council), to team up with the real estate unit of the Shenzhen metro operator.

Under the plan, the property developer would issue new shares worth Rmb45.6 billion ($6.9 billion) to buy the development rights of two premier sites situated in Shenzhen’s Qianhai.

When completed, the deal would make Shenzhen Metro Vanke’s biggest shareholder with a 20.65% stake, diluting Baoneng’s stake to 19.27%.

However, that means that China Resources would also see its stake drop from around 15% to 12%.

Through this transaction, “what Vanke is buying is not two land sites, but the future,” the developer said in a statement. But China Resources made plain too its discontent over the arrangement. When asked about his thoughts on the plan back in March, Fu Yuning, the chairman of China Resources, queried: “Is the move really appropriate?”

Three months on, Vanke has still not convinced China Resources to warm to the plan. The rift was finally made public last week.

“We have indeed spoiled Vanke,” an unidentified China Resources executive angrily told China Financial Weekly.

The outburst came after Vanke’s 11-member board favoured the plan by a 7-to-3 vote. Independent director Zhang Liping abstained, citing a conflict of interest. Zhang’s decision was crucial. Vanke’s company charter stipulates that substantial transactions of this sort need to have the approval of two-thirds of its board members.

China Resources has three board seats and voted with all of them against the deal. It claimed that the plan has failed to attract a two-third majority, or eight of the 11 board members. But Vanke argued the two-third majority should be calculated on the basis of the number of voting board members (thus excluding Zhang). China Resources has vowed to vote against the proposal at the next general meeting and will file a complaint with the Shenzhen stockmarket regulator.

The state firm’s opposition came despite the fact that analysts have been generally supportive of the deal. Having Shenzhen Metro as a shareholder fits Vanke’s long-term strategy of pursuing a “railway and property” business model, developing real estate projects alongside new metro lines – an approach that has been hugely successful for Hong Kong’s MTR Corp.

One of China Resources’ other complaints is the price. At Rmb15.88 ($2.41) a share, Vanke’s proposed share issuance to Shenzhen Metro reflects a discount of over a third to the last traded price on Shenzhen’s A-share market (Vanke’s A-shares remain suspended, though its Hong Kong-listed H-shares resumed trading in January).

China Resources also questions why Vanke isn’t using cash or debt to finance the purchase instead of issuing new shares. After all, with a net debt to equity ratio of only 26% – a very healthy debt ratio for a property developer – Vanke can comfortably afford to borrow to pay for the assets.

“The reason China Resources is objecting to the deal has nothing to do with the selection of the counterparty (i.e. Shenzhen Metro). It also recognises the land assets in question are of high quality. However, it simply can’t get on board with the price and the way the deal is structured,” one company insider told 21CN Business Herald.

ThePaper.cn, also citing an insider, says that China Resources has long been mulling over merging Vanke into its property unit China Resources Land, which is listed in Hong Kong. But that plan would be derailed if both Baoneng and Shenzhen Metro entered the fray. The newspaper says China Resources has already received the approval from Sasac to buy the entire 9.5% stake of Vanke held by other state-owned enterprises in order to retain control of the developer.

Meanwhile, Vanke says it is not backing down. Tan Huajie, Vanke’s vice president, says the developer will “overcome all obstacles to try and get the plan passed” and that it will resolve the dispute with China Resources through legal or “other effective means”.

Vanke will schedule a shareholder meeting to vote on its board’s latest decision. Baoneng said yesterday it would vote against the deal.

“Under Chinese stockmarket regulation, as the company’s largest shareholder, Baoneng needs to wait until the end of the year before it can offload its shares. So seeing Vanke’s shares plummet is the last thing Baoneng wants,” one industry source told 21CN.

“The most exciting M&A battle in China has begun. In the next three months, or even a year, all the warring parties will fight on bloodily to solve the ultimate question: to whom should Vanke belong,” China Financial Weekly reckoned.

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