Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Hostile takeovers are rare in China and it isn't often that an upstart raider finds itself holding the upper hand.

That's looking increasingly like the case for Baoneng, a little-known company that became the biggest shareholder in China Vanke after quietly amassing stock in the nation's largest publicly traded developer last year. Vanke's efforts to protect itself have now been thrown into question by opposition from its second-largest shareholder.

Wang Shi, chairman of Shenzhen-based Vanke, brought in the local government as a white knight to fend off Baoneng. The developer plans to buy two residential-commercial projects from Shenzhen Metro in exchange for 46.5 billion yuan ($6.9 billion) of shares, a deal that would turn the city government into the largest owner and dilute Baoneng.

Before and After
If Vanke's stake sale to Shenzhen Metro is approved, the city government will become the biggest shareholder
Source: Citi Research Estimates

So far so effective as a takeover defense, except that the deal would also dilute China Resources, a state-owned conglomerate that owns 15.24 percent of Vanke. The Beijing-based group is unhappy, and has questioned the legality of a board resolution on Friday approving the deal.

The proposal was supported by a 7-to-3 majority, with the three China Resources representatives voting against and one director abstaining. Vanke's second-largest shareholder contends that a two-thirds majority of the full board is required, or eight of the 11 total.

Its objections to the deal are understandable. Vanke is issuing shares at 15.88 yuan each, a 35 percent discount to their close on Dec. 18, the last day of trading before they were suspended. The company's Hong Kong-listed shares, which resumed trading in January, have fallen 26 percent since then and were valued at the equivalent of 14.4 yuan as of Monday's close.

The 3 billion shares Vanke plans to issue would dilute China Resources' stake to 12.1 percent, placing it behind Shenzhen Metro and Baoneng. The conglomerate, controlled by the central government, says that Vanke could have used cash or debt to finance the purchase.

That argument has merit, considering the 52.8 billion yuan of cash on Vanke's balance sheet as of the end of March (though misses the point of a share-based transaction, which is to act as a takeover defense). With a net debt-to-equity ratio of 33.7 percent, the developer's leverage is modest, compared with the 136 percent for Evergrande Real Estate or 98 percent at Sunac China.

Financing Options
China Vanke's net debt-to-equity levels aren't as high many of its local real estate peers
Source: Bloomberg

China Resources also has misgivings that Vanke is paying so much for property in Shenzhen, which is showing signs of bubble-like excess with new apartment prices surging 53 percent in May from a year earlier. The land price also excludes taxes, a significant omission in calculating costs, it says.

Other objections are more curious. A model that relies on building along subway lines would be prone to government intervention, which could hobble construction and lead to delays, according to China Resources. That ignores the inherent attractiveness of such projects and the local government's common interest once it becomes a shareholder.

With the threat of intervention from the regulator or the exchange, the end game for Vanke is now harder to see. Even if regulators give their blessing to the Shenzhen Metro acquisition, approval will still be needed from more than two-thirds of shareholders at separate meetings for Shenzhen and Hong Kong investors.

Failure to push through the deal would beg the question of what happens next. China Resources could seek to tighten its own hold on Vanke. Anbang, the acquisitive insurer that built up a stake in the developer (and was welcomed by management), could emerge as a wild card. Or Baoneng and its affiliates may find the way open to renew their pursuit. 

Whatever happens, China Vanke remains in play. That's good news for the raider, which is already sitting on a tidy profit after Vanke shares surged 62 percent in December. Who says it doesn't pay to be turn hostile in China?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Matthew Brooker at