Cosco Pacific Sells CIMC Stake to Parent for $1.2 Billion

Cosco Pacific Ltd., the container-terminal arm of China’s biggest shipping group, agreed to sell its stake in the world’s largest shipping-container manufacturer to its parent for $1.22 billion.

The company will sell Cosco Container Industries Ltd. to a unit of China Ocean Shipping Group Co., according to a Hong Kong stock exchange filing yesterday. Cosco Container’s major asset is its 21.8 percent holding in China International Marine Containers Group Co.

Cosco group Chairman Wei Jiafu is restructuring the assets of his flagship China Cosco Holdings Co. to help the company return to profitability as a third straight annual loss may result in its shares being delisted in Shanghai. The deal will help China Cosco book about 1.2 billion yuan ($196 million) of gains, according to Credit Suisse AG analysts led by Davin Wu.

“We see the deal as slightly positive news,” Hong Kong-based Wu wrote in in a note yesterday. “Although this has resulted in the loss of a profitable asset, Cosco Pacific is compensated by 16 percent valuation premium.”

Shares in Cosco Pacific jumped 4.1 percent, the most since Nov. 19, to close at HK$11.24 in Hong Kong trading today. China Cosco climbed 3.5 percent to HK$3.54, while stock in CIMC was unchanged. The city’s benchmark Hang Seng Index fell 0.54 percent.

Scrapped Plans

China International Marine Containers Group had been planning to sell U.S. dollar-denominated bonds for the first time as recently as a week ago and had hired eight banks to help manage the sale, a person familiar with the matter said May 15. Those sale plans, via unit China International Marine Containers (Hong Kong) Ltd., have since been postponed, other people said later that week.

“The gain in Cosco’s share price after the announcement shows the market recognizes CIMC has been a drag on its performance,” said Singapore-based Leong Wai Hoong, who buys investment-grade and high-yield Asian dollar bonds at Nikko Asset Management Co., which managed about $154 billion as of Dec. 31. “CIMC should be seen as a high-yield credit and should be priced accordingly if it were to try a bond sale again.”

Bond Yields

Under the terms of the planned bond, a change of control would have taken place if China Merchants Holdings International Co., which indirectly held 25.54 percent of China International Marine Containers Group as of May 3, Cosco Pacific or any other China state-owned-related entities collectively ceased to be the largest beneficial holder of the voting rights of China International Marine Containers Group, according to the draft sale prospectus.

Cosco Pacific’s $300 million of 4.375 percent notes due 2023 rose to 97.436 cents on the dollar from 97.429 cents as of 4:52 p.m. in Singapore, sending yields to 4.707 percent, ING Groep NV prices on Bloomberg show.

The yield on China Ocean Shipping Group’s 1 billion yuan of 4.55 percent notes due 2015 rose 1.8 basis points yesterday, the most in four weeks, to 4.181 percent, according to Chinabond pricing on Bloomberg. The state-backed group has the equivalent of $8.2 billion in bonds and loans outstanding, according to data compiled by Bloomberg.

The sale allows Cosco Pacific to “realize a return on its investment in CIMC” and to “redeploy its resources into business which are expected to create enhanced value to shareholders,” Cosco Pacific said.

Independent Shareholders

Cosco Pacific’s first-quarter net income fell 14 percent from a year earlier to $66.1 million as operating costs from the terminal business increased. CIMC’s quarterly profit fell to 219.4 million yuan from 375.3 million yuan a year earlier, according to data compiled by Bloomberg.

The deal is subject to approval by the independent shareholders of both Cosco Pacific and immediate controlling shareholder China Cosco Holdings, according to the filing.

The yield on CIMC’s 2 billion yuan of notes due 2015 and sold in May last year rose to 4.151 percent yesterday, the highest in more than a week, Chinabond prices show.

China Cosco last had an annual profit in 2010, according to data compiled by Bloomberg. Companies that post two straight annual losses can be subject to a “special treatment” designation that cuts the daily trading limit for gains or losses to 5 percent from 10 percent, according to Shanghai stock exchange rules. A third consecutive annual loss may result in shares being delisted.

China Cosco said in March it plans to sell Cosco Logistics Co. to state-backed parent China Ocean Shipping for 6.74 billion yuan. The sale will give China Cosco a pretax gain of about 1.96 billion in 2013, the company said.