Property sale

Why Evergrande sold Vanke stake at a hefty loss


From Guangzhou to Shenzhen

There is a popular (if somewhat gruesome) Chinese saying that “If you can’t stand the pain of using a child as the bait, you will never catch the big wolf.”

Real estate developer Evergrande seemed to follow a similar strategy last week when the company announced that it will sell the entire 14.1% stake it owns in its rival Vanke to Shenzhen Metro. The deal will render the state subway operator the largest shareholder in the Shenzhen-based property firm.

The problem? The deal will net Evergrande a trading loss of Rmb7.1 billion ($1.1 billion), although it claims that proceeds of the sale will help to cut debt.

Evergrande began snapping up Vanke’s shares in the open market in August last year while Vanke was embroiled in a takeover battle with Baoneng, a property-to-insurance conglomerate, which has also accumulated a 25% stake in Vanke.

Vanke then brought in Shenzhen Metro in a bid to dilute Baoneng’s unsolicited investment. The subway firm initially agreed to a Rmb45.6 billion ($6.69 billion) asset swap with Vanke. That proposal fell apart in the face of opposition from China Resources, which was Vanke’s biggest shareholder before Baoneng’s raid. Early this year, however, China Resources walked away from its long-term holding in Vanke and sold it to Shenzhen Metro for Rmb37.2 billion.

With Evergrande now also selling its shares to Shenzhen Metro, the subway firm will own 29% in Vanke and trump Baoneng as the developer’s single biggest shareholder. Most analysts believe that the insurer will exit as well and sell its stake, thus putting an end to China’s biggest hostile takeover saga (a sale to Shenzhen Metro will give the railway firm more than half of Vanke’s voting shares).

As for Evergrande’s decision, the writing has been on the wall for some time. Back in March, Evergrande had already given its voting rights to Shenzhen Metro.

Needless to say, Evergrande’s seemingly magnanimous exit has ulterior motives.

In June last year the company changed its name from ‘Guangzhou Evergrande’ to ‘China Evergrande’, indicating its wider focus. It has since been actively courting the Shenzhen government and it has won bids for 21 redevelopment projects in Shenzhen that could be worth over Rmb400 billion in value.

Moreover, Evergrande has moved its company registration from Guangzhou to Shenzhen, with reporting that it is mulling a shift of its own headquarters to Shenzhen too.

“Let’s not pretend that Xu Jiayin [chairman of Evergrande] doesn’t know how to make money from the stock market,” one commentator on Sohu Finance, a portal, wrote. “Offering the Vanke shares to Shenzhen Metro is Evergrande’s ‘big gift’ to the Shenzhen government. Of course, it also expects something in return.”

Ultimately, what Evergrande wants is the Shenzhen government’s blessing for its backdoor listing via a shell company called Shenzhen Real Estate. Evergrande has been undergoing a major restructuring to lower its debt load – the highest in the property industry – to pave the way for its relisting (see WiC364). Its valuation is expected to be substantially higher on the Shenzhen stock market than in Hong Kong, where it currently trades.

As a further sign of the increasingly close relationship between Evergrande and the Shenzhen government, Shenzhen Baoxin Investment, a company controlled by the municipal government, was one of the investors that took part in Evergrande’s Rmb39.5 billion latest fundraising early this month. The developer also inked a deal in March to enter into a strategic agreement with the Shenzhen government to work together in urban construction and rail transit.

“On the surface, Evergrande made a Rmb7 billion loss by transferring the Vanke stake to Shenzhen Metro. But with the backing of the Shenzhen government, it is going to receive more favourable policy terms in the redevelopment projects in the city. Evergrande’s listing plan in Shenzhen is also going to be smooth sailing. So whichever way you look at it, the potential economic value from this single transaction is unfathomably deep,” another commentator on Sohu Finance wrote.

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