The ‘invisible hand’ of the market is supposed to deliver unintended social benefits. But over the last few months, a more visible force seems to have been pulling the strings in the long-running takeover battle for China’s second largest residential developer Vanke.
Citic Securities says the China Securities Regulatory Commission (CSRC) has adopted an “iron fist” in its approach to Vanke’s suitors Baoneng and Evergrande, describing such ‘corporate raiders’ as “barbarians, robbers and ghouls”.
The struggle for control has also been emblematic of the push-and-pull between the animal spirits of Chinese investors and the government’s desire to develop a mixed ownership model for the economy without ceding overall control.
Vanke is symbolic as its founder Wang Shi built the firm on the basis of ‘mixed ownership’ (both the private sector and the state have ownership interests) long before it became a fashionable term. As we wrote in WiC308, Wang didn’t secure a large stake for himself when Vanke was created; nor did he rip-off local government partners. Vanke has been run along more modern management lines with the ultimate backing of its largest shareholder, state giant China Resources, which purchased a stake in 2000.
However, the Shenzhen and Hong Kong-listed group’s dispersed shareholding left it more exposed to a hostile takeover in an environment in which market forces, abundant liquidity and increasing leverage is coming into play. So Wang has drawn on his connections to deploy a white knight, Shenzhen Metro Group (owned by Shenzhen Sasac, a state manager of assets), to hold back his would-be usurpers. Last week SMG announced that it had purchased China Resources’ 15.3% stake for Rmb37 billion ($5.38 billion). This represented a 7.8% premium to the stock’s Rmb20.4 close, but was nevertheless a good price for SMG as the shares had been 20% higher only a month or so earlier.
Caixin Weekly suggests that China Resources sold its stake to curry favour with the regulator, which was unimpressed by its behaviour last June when it used its three board seats to block Vanke’s Rmb46 billion plan to purchase SMG assets through a new share issue. The move would have diluted existing investors by a quarter, stymying Baoneng’s ambitions to get to the 30% ownership level that triggers a general offer.
The privately-held insurance conglomerate had emerged as Vanke’s largest shareholder after quietly building its holdings in the open market. By last summer, it held 25%. A second insurer, Anbang had also built up a 6% stake.
Less clear were the intentions of rival developer Evergrande, which announced that it had purchased a 4.68% stake in the summer (increasing it to 14% later in the year).
The regulators responded with a carrot-and-stick approach. Insurance bosses wielded the stick by banning equity purchases using products funded by insurance deposits. But Caixin says the securities regulators offered Evergrande the carrot of a backdoor listing in Shenzhen, which it applied for this month. Evergrande now says it’s willing to sell its shares to SMG when a lock-up expires in May.
Baoneng’s aggressive approach has helped to make its founder, Yao Zhenhua, China’s fourth richest man, according to the Hurun Rich List. Analysts are unsure on the breakeven point for its Vanke shares. Citic Securities says it has heard a figure of Rmb16.50 a share, although it advises Baoneng to be “smart enough to stay quiet” as it stands to make a substantial amount if it decides to sell out when another lock-up expires in July.
Vanke, meanwhile, has a new business partner, which will help it to refashion its business model, and focus on a more cash-generative business. One option is to reintroduce the plan to inject SMG’s real estate assets into the property giant. If so, this will give it access to high-quality land around metro stations in Shenzhen (China’s priciest property market on a price-to-income ratio, according to Caixin).
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