Heads turned in May when the Chinese government invested $3 billion of its $1.3 trillion stockpile of foreign reserves for a nearly 10% stake in the Blackstone Group (BX), the U.S. private equity firm founded by Stephen Schwarzman and Peter G. Peterson. Now, Beijing has just stormed into the world's biggest-ever bank takeover drama, for the Dutch financial group ABN Amro Holding (ABN).
On July 23, Barclays (BCS) announced that state-run China Development Bank and the Singapore government's investment arm Temasek will invest up to $18.5 billion in the British bank, which is vying with an investment consortium led by Royal Bank of Scotland to buy ABN Amro. China's potentially $13.5 billion-plus portion of the investment would be the largest overseas investment by a mainland company.
Barclays also announced that it would sweeten its stock-and-cash bid for ABN Amro to $93.4 billion, from about $90 billion. However, unlike the previous offer from Barclays, this offer will consist of far more cash, about $34.3 billion. On July 16, RBS, together with Spanish lender Banco Santander (STD) and Belgium-based Fortis Bank, increased its primarily cash bid for the Dutch bank to $98.4 billion.
ABN Amro's top management has stated a preference for teaming up with Barclays, but shareholders were expected to favor the RBS consortium's offer because of the higher price. By narrowing the price gap, Barclays Chief Executive John Varley hopes to stay in the chase for the Dutch bank. "We have announced a restructuring of our proposed offer for ABN Amro that represents an improved deal for both Barclays and ABN Amro shareholders and introduces a significant element of cash," Varley said in a statement.
Areas of Cooperation
At a news conference in London, Varley elaborated that "two ghosts" worrying Barclays investors have been "exorcised" with the new deal. First, that Barclays would make an irresponsibly high offer to win ABN; and second, that it would make a big stock offering at a discount. Instead, he says, the bank is raising cash through a share sale at roughly market price.
Barclays management also says that the deals with China and Singapore have the potential to open up enormous business opportunities for the London bank. President Bob Diamond says that when brainstorming on how to raise cash, Barclays management had identified the two Asian institutions as top choices as partners. "This is really long-term smart money," he said. "China is real."
Diamond outlined areas that Barclays and CDB have already identified for cooperation. These include asset management, where Barclays' Global Investors unit is the world leader in exchange-traded funds and other quantitative financial products. Diamond also sees big gains in China for the commodities arm of Barclays Capital, the bank's investment banking wing; China is now the world's largest user of industrial metals and the second-largest oil consumer after the U.S. Barclays' network of 300 bank branches in Africa also could help expedite China's rapid expansion on the continent.
"This is really going to be a big thing," Diamond said, suggesting that the "strategic breakout" of Barclays' Asia deal has stolen a move on the bank's bigger rivals, Morgan Stanley (MS) and Goldman Sachs (GS).
Another intriguing angle to this latest twist in the ABN Amro saga is the growing willingness of the Chinese government to play perhaps a decisive role in a politically sensitive takeover drama overseas. China Development Bank, traditionally a lender to big, state-directed infrastructure projects on the mainland, is trying to transform itself into a viable commercial bank and has global ambitions.
Under its deal with Barclays, the Chinese lender will initially pay $3.04 billion to buy a 3.1% stake in the British bank. However, the total investment by China Development Bank could reach $13.5 billion if Barclays bags ABN Amro, and its total stake in the combined bank could reach 7.7%. (Temasek has agreed to invest up to $2 billion, and its stake in the newly merged bank could hit up to 2.9%.)
Second High-Profile Deal
"This strategic and financial collaboration is the next step in the evolution of China Development Bank into a commercially operated financial institution," said the bank's Governor Yuan Chen in a statement. "China Development Bank strongly believes that this long-term investment in Barclays will be financially attractive."
This is the second high-profile deal by China in the world of high finance. On May 20, China's State Investment Co., a new agency mandated to manage some $200 billion of the country's foreign currency reserves, invested $3 billion in Blackstone, ahead of the U.S. firm's $4.75 billion initial public offering on the New York Stock Exchange (NYX) last month. The Chinese government paid $29.60 per share before the IPO. Blackstone shares are now trading at just under $26 per share.
A big-ticket investment in Barclays would be another reminder of the escalating money power of the Chinese government, and its willingness to use its money clout to sway key takeover contests in the West. China's foreign reserve stockpile recently topped $1.3 trillion, a figure 46% bigger than Japan's and equal to about 27% of the U.S.'s outstanding debt, a July 20 Lehman Brothers (LEH) report points out.
Tremendous Financial Firepower
Thanks to China's supercharged export sector, foreign exchange reserves increased by $267 billion during the first half of 2007. "This pace of reserve accumulation—in annualized terms equivalent to about 15% of China's gross domestic product and two-thirds of the U.S. current account deficit—appears unprecedented, and is one of the world's most compelling macro developments," the Lehman note to clients concluded.
If China and Singapore's financial backing of Barclays proves decisive in the ABN Amro takeover drama, this would be a particularly crushing development for RBS. Back in 2005, the Scottish bank and other investors pumped $3.1 billion into Bank of China as part of a strategic capital infusion to help the mainland lender improve its operations.
China's State Investment Co. will have tremendous financial firepower at its disposal and could play a big role in global capital markets. However, some suggest the new investment fund will be most interested in investing like a big pension fund and generating steady returns, rather than jumping into high-stakes bidding wars.
"They will buy stakes in companies like a typical equity fund," says Mingchun Sun, a Hong Kong-based Lehman analyst. "I don't think they will specialize in private equity." Adds Standard Chartered Senior Economist Stephen Green: "They want to run a fund that has quarterly earnings," which suggests more short-term and liquid investments in "equities, bonds, and commodities."