The market rumour-mill was working overtime in Asia late on Wednesday about big business in shares in China Construction Bank. The chatter followed Tuesday’s news of Bank of America’s $7.3bn disposal of more than a third of its stake in CCB to a small group of investors led by buyout firm Hopu Investment Management, and including Temasek of Singapore and China Life Insurance.
BofA sold 13.5bn shares, or close to 6 per cent of CCB, at HK$4.20 each, to the investor group - a 14 per cent discount to Monday’s closing price of HK$4.90 a share and larger than the 12 per cent discount offered when BofA sold a $2.8bn stake in CCB in January. The WSJ says that banks representing BofA in the days leading up to the sale had sought buyers at prices closer to current market levels but that a reduction in price helped seal the deal.
Strange, then, that a tidy parcel of $465m of shares were flogged in Hong Kong on Wednesday at the attractive price of HK$4.88 a piece, according to reports on Bloomberg and Reuters. The identity of the seller was not known, although traders had only one theory about who it was.
Even stranger that, as far as FT Alphaville understands, before the sale to the Hopu group, BofA had big institutions already lined up – via a group of investment banks – who were seemingly prepared to pay a smaller discount. Clearly, Hopu and friends offered more certainty, even if it did leave some pretty aggrieved institutions around Hong Kong.
Of course, BofA already risked souring its carefully cultivated relations with Beijing by selling CCB stock at all - especially in the wake of its sale in January of a 2.5 per cent stake for $2.8bn, booking a $1.1bn profit. The month before that January sale, BofA abruptly shelved plans for a $3bn sale of CCB stock after objections from Beijing, as the FT reported in December.
You can envisage the recent conversations between BofA’s Ken Lewis and his Chinese counterparts: “Look, guys, you know that share sale we pulled in December at your request…? Well, times are bit tough right now…”
The Hopu-led group is seen as extremely China-friendly, the sort of “responsible” investors that any big Chinese company would welcome. Beijing-based Hopu was founded in 2007 by Fang Fenglei, the very well-connected former head of Goldman Sachs’ mainland securities joint venture in China – and both Temasek and Goldman are investors in the $2.5bn fund. China Life has held a small stake in CCB since its IPO in 2005 and Temasek, meanwhile, held a stake of about 5.6 per cent in CCB before this week’s purchase.
This, as Lex notes, “is the way China would have wanted it”:Previous sales of stakes in its banks were slapdash affairs, giving the impression sellers could not exit fast enough. When UBS sold its sub-2 per cent stake in Bank of China in January, for example, 3.4bn shares ended up spread between at least a dozen hedge funds. In China Life and Temasek, Beijing can be assured of long-term holders. And Hopu is the right kind of locust…it was among about 20 institutions that bought Bank of China shares offloaded by RBS in January.
For BofA, which has emphasised it intends to remain a long-term shareholder and “strategic partner” for CCB (and indeed, it still owns about 11.4 per cent of the bank), it made perfect sense to sell to a Beijing-preferred buyer – a relatively small short-term loss for a longer term gain. Indeed – and whatever the Chinese might make of so-called American “banking expertise” – BofA even seconded staff to CCB to advise on western banking practices. As BofA chief Ken Lewis noted early this week, “We always want to have a very large ownership position (in CCB).”
As for Hopu, Finance Asia gives us more insight into the firm’s cosy links with CCB:
Hopu’s founding chairman, Fang Fenglei, used to work at CCB before he teamed up with Goldman Sachs to run Gao Hua Securities; Hopu CEO Richard Ong helped Temasek make its initial investment into CCB three years ago when he was co-head of Asia investment banking at Goldman Sachs; and the firm’s vice-chairman, Dominic Ho, used to be an auditor for the Chinese bank. The fund raised $2.5 billion from overseas investors, including Goldman Sachs and Temasek last year.
For private equity and other foreign investors alike, part of the attraction of holding CCB shares is that the Chinese bank is a good proxy for the Chinese economy and pays large dividends, “which makes it a good defensive play”, notes Finance Asia, adding:However, it was also important to the buyers that there are no other large blocks due to be released for sale in the near future that could act as an overhang and depress the share price. That last criteria was also key when Hopu bought about one-third of Royal Bank of Scotland’s $2.4 billion exit from Bank of China through a placement in mid-January.
BofA’s remaining stake in CCB is now locked down until August 2011. Meanwhile, Lewis may be thinking it’s possibly time to rile the Brazilians, according to a note out from Deutsche Bank on Wednesday speculating that it may consider selling its stake in Banco Itau, Brazil’s biggest bank, for as much as 6bn reais ($2.5bn), reports Bloomberg.
BofA, which owns 8.5 per cent of Itau’s preferred stock and 2.5 per cent of its common stock, gained an instant expansion of its Latin American business with its recent acquisition of Merrill Lynch. And, as Lex notes, for cash-hungry BofA, “every little counts”:Required last week to raise $34bn, it has just done more than a fifth of that. Goldman, meanwhile, is in the unusual position of being at the mercy of events rather than master of them. It already owns 5 per cent of one Chinese bank – ICBC – directly, under strict lock-ups. And, as it was an anchor investor in Hopu, it now has indirect exposure to two more. Still, we are long past the point where gweilo bankers call the shots.
Related links:
BofA raises $7.3bn from CCB stake – FT
BofA gets $7.3bn in CCB sale – WSJ
Construction Bank holder sells $465m of shares – Bloomberg
Fang Fenlei and Fred Hu: one bank, two rainmakers – Euromoney
BofA sells CCB shares in private deal – Finance Asia
BofA shelves $3bn plan to cut CCB stake – FT
BofA/CCB – Lex