May 30 (Bloomberg) -- China Merchants Bank Co., the nation's most profitable lender, agreed to acquire control of Hong Kong's Wing Lung Bank Ltd. in a cash deal valuing the company at $4.66 billion, two people with direct knowledge of the matter said.

Merchants Bank signed an agreement today to buy a 53 percent stake at HK$156.50 per share from Wing Lung Chairman Michael Wu and his cousins, the people said, declining to be identified before an announcement scheduled for June 2. The price is a 6.2 percent premium to yesterday's close.

The Shenzhen-based bank beat out Industrial & Commercial Bank of China Ltd. and Australia & New Zealand Banking Group Ltd. in a three-month battle to win 35 branches in Hong Kong, which has the world's highest ratio of millionaires. Merchants Bank, 12 percent owned by a state investment arm, is paying 3.1 times book value for Wing Lung, more than Chinese regulators recommended, in its first acquisition outside mainland China.

``It's not cheap, but nothing is cheap these days,'' said Winson Fong, who helps manage $3 billion in Asia outside Japan at SG Asset Management Hong Kong Ltd. ``It's a very convenient way to open 35 branches in Hong Kong and at the same time hiring a bunch of banking professionals in one go.''

Both banks were halted from trading in Hong Kong today. Merchants Bank plans to complete the purchase of the Wu family's stake in three months before making a general offer to other shareholders for the entire company, the people said.

China's Ministry of Finance told state-owned ICBC not to pay more than 2.85 times book for Wing Lung, two people with knowledge of the matter said this week. Merchants Bank was also advised by regulators to follow that guidance, they said.

Founded in 1933

The average price-to-book ratio among Hong Kong's 18 publicly traded banks is about 2.3, according to data compiled by Bloomberg. Merchants Bank's offer represents 3.1 times Wing Lung's March 31 book value and 2.9 times end-2007 equity.

Patrick Poon, a spokesman for Wing Lung, declined to comment, as did Guo Xiaoli, a Shenzhen-based spokeswoman at Merchants Bank. JPMorgan Chase & Co. advised the buyer. Credit Suisse Group and UBS AG are advising the selling shareholders. Xie Taifeng, a Beijing-based spokesman at ICBC, was not immediately available for comment.

Wing Lung, a family-run bank founded in 1933 with initial capital of $5,700, has $12 billion of assets. On April 30, the bank reported a first-quarter loss after writing off $61 million of investments in structured investment vehicles and collateralized debt obligations.

Merchants Bank, based across the border from Hong Kong, had one branch in the city at the end of 2007, with 72 employees and 19.5 billion yuan ($2.8 billion) of assets. The company has 570 branches on the mainland.

Chinese Branches

Michael Wu owns 24.9 percent of Wing Lung. Vice Chairman Patrick Wu and Chief Executive Officer Philip Wu, advised by Credit Suisse, own a combined 28.2 percent, according to the company's annual report.

``It is a very rare opportunity to obtain control in a Hong Kong bank and there's scarcity value,'' said David Chin, a managing director at UBS, which is advising Michael Wu on the sale. ``This is the first overseas acquisition by Merchants Bank and reflects its determination to expand overseas.''

ICBC, the world's largest bank by market value, paid $231.5 million for control of Union Bank of Hong Kong Ltd. in 2000, its first acquisition outside the mainland. China Construction Bank followed six years later, buying Bank of America Corp.'s Hong Kong and Macau units for $1.24 billion in what was then the largest overseas takeover by a Chinese lender.

Bank of China, the nation's third-largest by market value, has more than 280 branches in Hong Kong. ICBC, through its ICBC (Asia) Ltd. unit, has more than 40. China Construction Bank Corp. has 21 branches in the city.

`Crazy' Valuation

Wing Lung shares have surged as much as 96 percent since March 11, as Merchants Bank, ICBC and ANZ entered into a bidding contest for the bank. As late as March, Wing Lung traded at about 1.5 times book value.

ANZ Bank Chief Executive Officer Mike Smith, speaking in the eastern Chinese city of Tianjin yesterday, said paying more than three times book value for Wing Lung would be ``crazy,'' and suggested that closer to two times book would be a fair valuation.

``Why would you pay three times book for an institution like that,'' Smith said.

DBS Group Holdings Ltd., Southeast Asia's biggest bank, bought Hong Kong's Dao Heng Bank Group Ltd. in 2001 for $5.4 billion. Management was accused of overpaying at more than three times book, and the Singapore-based bank wrote down S$1.1 billion ($806 million) of goodwill created by the takeover in 2005.

To contact the reporters on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net; Luo Jun in Shanghai at jluo@bloomberg.net;

Last Updated: May 30, 2008 04:43 EDT