M&A, Talking Point

Hostile behaviour

Is Minsheng Bank being sucked into a takeover war?

Minsheng w

The stakes are high: China Oceanwide doubled its equity stake in the bank this month

The Yangtze River waterway between Chongqing and Shanghai was once the key artery of the Chinese economy. The competition between the navigation companies that transported people and goods along that section of the river was fierce, but that didn’t stop Lu Zoufu launching his own shipping line in 1925 with a single steamboat.

The Sichuan native called his startup Minsheng, which stands for ‘people’s livelihood’, a reference to one of the Three People’s Principles proposed by Sun Yat-sen, the founder of republican China.

To challenge his more established rivals such as government-owned China Merchants, Lu brought in powerful shareholders including Sichuan’s warlords and Shanghai’s mafia bosses. By 1938 when Chongqing became China’s wartime capital, Minsheng was the undisputed market leader. Even Mao Zedong praised Lu as a “patriot” and one of the four entrepreneurs that China should never forget.

That, of course, didn’t prevent Mao from subsequently seizing Lu’s shipping empire. In 1952 Minsheng became part of a state-run firm and Lu killed himself.

Minsheng’s fate was reversed in 1984 when private firms were once again permitted to operate in China. The Sichuan government helped Lu’s son to relaunch his father’s business and the privately-run Minsheng has since developed into a major logistics conglomerate, taking over a number of defunct state-owned enterprises (SOEs).

In 1993, when former Chinese Premier Zhu Rongji received a proposal to create a new bank to better serve the country’s fledging private sector, he supported the idea, proproposing to call the new bank Minsheng. The lender would be co-owned by private firms and compete directly with the country’s big four state banking giants. Since then China Minsheng Banking Corp has grown into a major lender with Rmb320 billion ($48 billion) in assets. In fact, the bank has nothing to do with Lu Zoufu’s original shipping firm. But this month it has also found itself in a similar tug of war between the state and the private sector.

The tussle for control was stoked by another Lu – the bank’s vice chairman Lu Zhiqiang. Market observers are now waiting to see if another takeover war will break out, akin to what has been happening at China Vanke (see WiC308), the country’s most iconic property developer.

Lu’s latest move?

Born in Shandong, Lu Zhiqiang (see WiC50 for his profile) isn’t thought to be related to Lu Zoufu. But he also counts as one of modern China’s most influential businessmen. Lu founded China Oceanwide in 1985, a year after Liu Chuanzhi set up the computer maker Lenovo. Indeed, Liu has been a long term ally of Lu Zhiqiang, whose property conglomerate acquired a 29% stake in Legend Holdings (the parent firm of Lenovo) in 2009 from the Chinese Academy of Social Sciences for Rmb2.7 billion. The transaction was symbolic as it marked the dismantling of Legend’s SOE status (see WiC31).

Lu and Liu also collaborated to establish the exclusive Taishan Club in 1993, an unofficial association of entrepreneurs named after the most famous mountain in Shandong.

In fact, according to Netease Finance, it was during the Taishan Club’s inaugural meeting – hosted by Lu in Shandong – that the idea of setting up a non-SOE bank was hatched and the proposal was thereafter sent to Zhu Rongji.

Oceanwide was one of the 59 private sector firms which co-founded Minsheng Bank in 1996. Despite their founding role, shareholders like Lu haven’t taken an active role in Minsheng’s management, however. Officials appointed by the central government have been left to run the bank. Or as Business, a Chinese magazine, has put it: “Minsheng was founded as a privately-owned, state-run and Party-controlled entity.”

That sounds like a typically Chinese arrangement. However, the three-way combination started to look more unstable this month when Lu raised his stake in Minsheng, which is dual-listed in Shanghai and Hong Kong.

In a regulatory filing, Minsheng said Oceanwide had bought nearly 844 million A-shares in the week prior to July 15. The purchases were worth Rmb7.5 billion and they have doubled Oceanwide’s stake in Minsheng to 4.61%. That now makes Oceanwide Minsheng’s second biggest shareholder behind Anbang Insurance.

Previously we’ve raised the possibility (see WiC269) that Minsheng could be poised for a takeover battle, after the acquisitive Anbang splashed about Rmb40 billion on Minsheng’s shares since 2014. That looks more plausible after Oceanwide’s latest action, although Lu has told Bloomberg that some observers were “over sensitive” in comparing his stock purchase to the ongoing battle for control at Vanke. “I will not act in concert with anyone,” Lu also told the news agency, ruling out speculation that he may collaborate with Anbang to take a bigger stake in Minsheng. Lu also declined to say whether Oceanwide will continue to raise its own stake in the bank.

Why is Minsheng unique?

The Chinese government is the controlling shareholder in most of the state banks. Take ICBC, the country’s biggest lender by value. The Ministry of Finance owns 35% of the shares, while the state asset manager Central Huijin holds another 35% stake.

But given that Minsheng was co-founded by 59 private sector firms, its shareholding structure has been more fragmented from the beginning, making it more vulnerable to corporate raiders.

In 2011 China Life began snapping up shares in Minsheng – at one point owning more than 5% in the bank as the state-controlled insurer sought to diversify into a bancassurance model. This roused objections. Shi Yuzhu, founder of Giant Interactive and the owner of a 3.1% stake in Minsheng (as of March) took to his widely-followed weibo account to protest against China Life’s bid for control. “China Life, please stop lurking behind Minsheng… Give the private sector a little space. Minsheng without private mechanisms will lose core competencies and bid farewell to rapid growth,” he wrote (see WiC124).

Then came Anbang. According to Minsheng’s most recent quarterly report, Anbang had amassed a combined 15.5% stake in the bank by the end of March. In late 2014 Anbang succeeded in appointing a representative to Minsheng’s board too.

China Life doesn’t even rank among the top 10 shareholders today, which implies the insurer has reduced its stake in Minsheng to below 2.5%. In fact, as the Securities Daily noted this week, the increase in Oceanwide’s Minsheng stake most likely occurred via a block trade with China Life.

“China Life is set to complete the takeover of the Guangdong Development Bank, which also operates nationwide. The strategic value of Minsheng Bank for China Life has diminished,” the newspaper suggested. (In February China Life bought a 20% stake in Guangdong Development Bank from Citigroup for Rmb$19.7 billion, raising its stake to 43.7%.)

That has placed Minsheng in a remarkably similar situation to Vanke. The property giant has been embroiled in a protracted takeover battle involving a state giant (China Resources) as well as a fast-growing insurer from the private sector (Baoneng, which is backed by Foresea Life Insurance). “The battle between Vanke and Baoneng is yet to be settled,” Guangzhou Daily noted. “The war horn for control of Minsheng has been blown too.”

Is Vanke’s case indicative for what might happen at Minsheng?

Hostile takeovers have been rare in the Chinese capital markets. The last notable case was back in 2012 when Sinopec and ENN Energy teamed up to prey on China Gas. The deadlock was broken with a business tie-up between Sinopec and China Gas, but one which forced the gas firm to sell a stake instead to white knights that included Beijing Enterprises (which is backed by the Beijing municipal government), South Korea’s SK Holdings and the London-listed Fortune Oil (see WiC169).

Vanke’s founding chairman Wang Shi has employed a similar strategy, proposing to introduce a metro operator backed by the Shenzhen government as a strategic investor (see WiC317). The intent was to dilute Baoneng’s stake, but the move has irritated Vanke’s long term state partner China Resources as well (see WiC330).

Wang is seeking help from foreign investors too. Last week Vanke said it and its “partners” had sealed a $1.9 billion deal with Blackstone Group to acquire the American fund house’s property firms. Vanke said the deal would not involve any new shares being issued but given the lack of details, analysts with domestic brokerages generally expect that Blackstone may also join the battle if the takeover struggle continues at the Chinese firm.

The M&A war has grabbed nationwide attention – and not only because what’s at stake is control of China’s biggest developer in terms of sales. According to CBN, it sets a precedent for a hostile takeover of a state-backed company by a private sector firm (Baoneng). On this crucial trend of guotuiminjin (‘the state retreats, the private sector advances’), Vanke has tested the China Securities Regulatory Commission’s stance by penning an open letter to the watchdog this week which accuses Baoneng of using illegal fundraising to help build its 25% stake in Vanke.

For the time being the CSRC has stayed neutral, with the regulator merely reprimanding the feuding parties for failing to reach a compromise. “So far we haven’t seen Vanke’s management or its major shareholders [a reference to both China Resources and Baoneng] make any sincere, effective efforts to eliminate the conflicts between them,” a spokesman said on Tuesday. “Instead they have intensified the conflict, regardless of capital market stability, the company’s development, and minority shareholders’ interests.”

So what’s next for Minsheng?

The CSRC’s remarks followed a sharp decline in Vanke’s shares, which resumed trading in early July following a long suspension. In less than a month, its shares have dipped nearly 30%, losing about Rmb80 billion in market value.

Most of the 356,260 shareholders of Minsheng will have been a lot more pleased by the bank’s recent share price performance. As of Wednesday Minsheng’s A-shares had climbed more than 3% in the past month, and its Hong Kong listed stock has risen 10% in the same period.

“Investors had been hoping for Lu [Zhiqiang] to strike a more aggressive posture. Coming on the heels of a hostile takeover attempt for Chinese real estate giant Vanke, a bidding war for Minsheng could light up the stock,” a columnist wrote on Bloomberg this week.

According to 21CN Business Herald, the power struggle at Minsheng has yet to reach a Vanke-style battle. Minsheng’s board of directors should have been up for re-election in May last year but the arrest of its president Mao Xiaofeng over corruption allegations put the process on hold. Oceanwide has been raising its stake in Minsheng, 21CN suggested, because Lu wants to ensure he can appoint his own representative to Minsheng’s board in the reshuffle.

Lu said earlier this year that Minsheng shouldn’t be controlled by a single company – suggesting he has no hostile intent. Yet the emergence of a new selection of private-sector banks is changing the landscape for Minsheng and its once solid shareholder base.

Indeed, even New Hope Group, China’s biggest agribusiness firm and another founding shareholder of Minsheng, set up a new lender last month with tech firm Xiaomi, provisionally known as Sichuan Hope Bank. New Hope has been selling down its stake in Minsheng and should it decide to divest its 4.1% stake entirely, fresh impetus would be injected into Minsheng’s M&A story.

Oceanwide isn’t the only property firm interested in banking stakes. Vanke has invested in Huishang Bank and is now the Anhui-based lender’s single biggest shareholder (see WiC217).

China Securities Journal reports that plenty of other real estate firms have invested in regional lenders in the last three years, such as Evergrande Real Estate (Huaxia Bank), Yuexiu Group (Hong Kong’s Chong Hing Bank) and Xinhu Zhongbao (Bank of Wenzhou).

“Oceanwide’s buying spree in Minsheng Bank shows that the interest in banking shares is on the rise,” China Securities Journal said. “The big battle over Minsheng’s control could be triggered at any moment.”

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