March 27 (Bloomberg) -- Citic Group Corp., the state-owned company that describes itself as a pilot of China’s economic reform, plans to make billions of dollars of its assets part of a Hong Kong unit. Shares of the unit surged by a record.
Citic Pacific Ltd. signed a framework agreement to acquire its parent’s main operating unit, Citic Ltd., the company said in a statement yesterday, without providing a total value for the deal. The unit has shareholder equity of 225 billion yuan ($36 billion), and Citic Pacific will pay for the purchase in cash and new shares, with the terms still being negotiated.
The move comes as Chinese President Xi Jinping advocates the most sweeping changes since Deng Xiaoping’s liberalization in 1978, including loosening yuan trading and allowing more private investments in state businesses. At $36 billion, a deal would be the biggest asset injection into a Hong Kong-listed unit by China, data compiled by Bloomberg show.
“The deal is consistent with the theme of state-owned enterprise reform, as one of the reform’s purpose is to increase securitization of national assets,” analysts from Goldman Sachs Group Inc., including Janet Lu, wrote in a report today. “If successfully completed, it would turn Citic Pacific into the largest listed conglomerate in China with a broader range of businesses.”
Shares of Citic Pacific jumped as much as 31 percent, a record gain, after resuming trading today. It was 13 percent higher to HK$14.34 at the midday break in Hong Kong.
Citic Ltd. is the largest conglomerate in China with holdings in companies including Citic Securities Co., the nation’s biggest listed brokerage, and commercial lender China Citic Bank Corp., according to a press release yesterday. It also has interests in businesses including mining machinery, real estate, and oil production.
The net income of Citic Ltd., excluding its interest in Citic Pacific, was 34 billion yuan for the year ended Dec. 31.
The price of Citic Pacific’s dollar-denominated 8.625 percent perpetual bonds jumped 4.22 cents on the dollar to 104.61 as of 12:10 p.m. today, poised for a record increase, according to prices compiled by Bloomberg.
Citic Pacific expects to issue shares to pay for the assets at a price of HK$13.48 each, it said in the statement yesterday.
Assuming that Citic Ltd. is priced between 0.6 and 1 times book value, Citic Pacific would have to issue HK$131 billion ($16.9 billion) of equity to its parent and at least HK$7 billion in new stock to the public to maintain its listing, Bank of America Corp. analysts said in a report today.
The move serves as a boon to Hong Kong after China’s largest e-commerce company, Alibaba Group Holding Ltd. said it plans to conduct its initial public offering in the U.S. after abandoning plans to list in the city. As part of its deal, Citic plans to move its domicile to Hong Kong, two people with knowledge of the matter said yesterday before the statement.
“With its established legal framework, high governance standards, international connectivity and strong talent pool, Hong Kong remains the ideal place for the next phase of our development and we are deeply committed to this market,”Citic Pacific Chairman Chang Zhenming said in the statement.
Beijing-based Citic Group, China’s first state-owned investment corporation, was set up in 1979 as part of paramount leader Deng’s push to modernize and open up China’s state-controlled economy.
Since its inception, Citic Group has been the “pilot of national economic reform and an important window on China’s opening to the outside world,” it said on its website.
At $36 billion, the deal would top China Mobile Ltd.’s $32 billion purchase of seven wireless networks from its parent to be the largest such asset injection into a Hong Kong-listed unit by a Chinese company, data compiled by Bloomberg show.
Citic Pacific was bailed out by its parent after wrong-way currency bets led to a 2008 annual loss of HK$12.7 billion. The company owns the Sino Iron project in Western Australia, a $9.9 billion magnetite iron ore mine that made its first shipment in December after delays and cost overruns.
Citic Pacific said last month it faces pressure to write down the value of the project. It reported a 9 percent gain in 2013 profit to HK$7.6 billion, even as losses at the iron-ore unit doubled.
“Citic’s move is trying to save Citic Pacific itself, because Citic Pacific will enter a few years of great difficulty because of its Australian mining project,” said Francis Lun, chief executive officer of Geo Securities Ltd. “The trend is to operate on market principles, tapping the market for funds as China goes from a planned economy to an open economy.”
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