Hong Kong’s Citic Pacific Ltd. agreed to pay 226.9 billion yuan ($36 billion) to buy Chinese banking and brokerage assets from its state-owned parent, underscoring China’s push to loosen control over the economy.
Shares of the steelmaker and property developer fell by the most in more than two weeks. It will pay 49.9 billion yuan in cash and issue almost 16.6 billion shares at HK$13.48 each, as well as raise funds from a separate share sale, according to a Hong Kong exchange filing yesterday. Citic Group Corp. will hold 75 percent to 85 percent of the combined business, it said.
The transaction 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. The deal, which is the biggest asset injection into a Hong Kong-listed unit from China, may become a model for similar moves by government-controlled companies.
“The mainland government wants to list most of the state-owned enterprises’ assets into public companies in order to improve corporate governance and operating efficiency,” Kenny Tang, general manager of Hong Kong-based AMTD Financial Planning Ltd., said by phone yesterday. “It’s quite a good effort to improve efficiency.”
Citic Ltd., the main operating unit of the Chinese group, has 225 billion yuan in shareholder equity. Its financial-services holdings, including stakes in Citic Securities Co. and China Citic Bank Corp., accounted for 87 percent of pretax profit last year. Real estate, infrastructure and engineering assets accounted for most of the rest.
The purchase price represents 0.9 times the combined company’s 2013 book value and 6.9 times last year’s earnings, according to a company presentation. The deal will be completed by Aug. 29, it said.
Shares of Citic Pacific, which will be renamed Citic Ltd., sank 2.9 percent, the most since April 1, to HK$13.88 as of 10:03 a.m. Hong Kong time.
The stock had climbed 13 percent through yesterday from March 24, when trading was suspended for an announcement about the transaction. The rally gave it a market capitalization of HK$52 billion ($6.7 billion).
While AMTD’s Tang said the impending equity fundraising will drag on Citic Pacific’s stock, he still expects the shares to rise to HK$16 to HK$18 in the next quarter. He has a buy recommendation on the shares.
The asset purchase will reduce a public float that currently stands at 42 percent, according to data compiled by Bloomberg. Hong Kong’s stock exchange requires companies to have at least 25 percent of their outstanding shares freely traded, though the limit can be reduced to 15 percent for firms with market capitalization of more than HK$10 billion.
The company will sell 4.68 billion shares to raise funds for the transaction and to restore its public float, according to the filing yesterday. About 50 billion yuan will be raised from selling new shares to institutional investors.
More shareholders and an improved credit profile following the transaction may give Citic Pacific more flexibility in raising funds, Janet Lu, a Hong Kong-based analyst at Goldman Sachs, said in a March 27 note.
Citic Group, China’s first state-owned investment corporation, was set up in 1979 as part of Deng’s push to modernize and open up the state-controlled economy.
Moving the assets to Hong Kong may help improve corporate governance for the Beijing-based group, Kenneth Ho, a Hong Kong-based analyst at Goldman Sachs Group Inc., wrote on March 31.
Citic Group is not alone among Chinese state-owned enterprises in preparing to sell assets to private investors. China Petroleum & Chemical Corp., the refiner known as Sinopec, said in February that it plans to sell as much as 30 percent of its oil retail unit. PetroChina Co. may allow private investment in areas including pipelines and gas exploration, Chairman Zhou Jiping has said.
At $36 billion, the Citic 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 unit by a Chinese company, data compiled by Bloomberg show.
The Citic transaction serves as a boon to Hong Kong after China’s largest e-commerce company, Alibaba Group Holding Ltd., abandoned plans to list in the city and said it will conduct its initial public offering in the U.S.
Citic Pacific 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, which is the single largest foreign mining investment by a Chinese company.
Its 2013 profit climbed 9 percent to HK$7.6 billion, even as losses at the iron-ore unit doubled.
Citic Pacific’s purchase “is positive for the listed company because the new assets injected into the company can generate more than HK$30 billion to HK$40 billion a year,” AMTD’s Tang said. “It mitigates cash-flow problems.”