For Vanke, Shenzhen Metro Deal Is ‘Life or Death’ Matter

  • Executive says deal will bring resources as land costs surge
  • Vanke seeking to model deal on Japan’s train operator Tokyu

China Vanke Co., the developer whose $6.9 billion stock sale to a Shenzhen train operator has now drawn opposition from its two major shareholders, said completing the deal is a “life-or-death” matter as it seeks new ways to expand amid surging land costs.

“For our firm, the deal is not like icing on a cake, it’s a crucial matter to our future,” Vanke Senior Vice President Tan Huajie told investors on a call on Sunday, according to a recording obtained by Bloomberg News. “If we fail, we are left in an inferior position with respect to our competition.”

The proposed transaction would make state-owned Shenzhen Metro Group Vanke’s largest shareholder, and in return the developer will get assets it plans to use for property projects. Vanke’s plan has been thrown into doubt, with its biggest stakeholder, Baoneng Group, on Friday joining the second-biggest, China Resources (Holdings) Co., to say it opposes the proposal to buy assets by issuing new shares and would vote against it at a shareholder meeting. Together, units of Baoneng and China Resources own close to 45 percent of Vanke’s A-shares, according to data compiled by Bloomberg.

‘Insider’ Control

Shenzhen Jushenghua and Foresea Life Insurance, units of little-known Baoneng, said in a statement the deal would dilute the interests of existing shareholders. Vanke’s board isn’t representing holders’ interests in a balanced way and the company is controlled by “insiders,” the two units said in the statement.

Meanwhile, China Resources, which has said it will vote against the deal and challenged a board decision to approve it, reiterated in a separate statement Friday in response to Baoneng’s units that it opposes Vanke’s plan to buy assets from Shenzhen Metro, while supporting its business cooperation with the subway operator. China Resources also said it has sent letters to regulators to report issues associated with Vanke board’s review and voting process regarding the plan.

The opposition from its two-largest shareholders adds uncertainty for Vanke’s efforts to counter Baoneng, which became the company’s largest shareholder last year in what Vanke management labeled an attempt at a “hostile takeover.” The Shenzhen Metro transaction was widely viewed by analysts as a way to dilute Baoneng’s ownership.

Hua’s Letter

Further muddying the waters, a deal between China Resources and Baoneng may be on the table. China Resources said at Vanke’s June 17 board meeting that it has reached consensus with the Shenzhen government to restore China Resources as Vanke’s largest holder, according to an article written by Vanke’s independent non-executive director Hua Sheng in Shanghai Securities News. China Resources said it has reached out to Baoneng, which wouldn’t be opposed to the state-owned firm becoming Vanke’s largest holder, Hua wrote in the report. Hua was among three independent directors who voted in favor of plan to buy assets from Shenzhen Metro by issuing new shares.

On the call with investors, some details of which have been reported in Chinese media, Vanke’s Tan said bringing in Shenzhen Metro as a shareholder will give the company quality project resources in key hubs at "reasonable" prices after land became prohibitively expensive in almost all first- and second-tier cities.

Tokyu Model

Vanke is seeking to model its deal with Shenzhen Metro on Japanese train operator Tokyu Corp., which develops real estate projects on its own or with partners, Tan told investors. Under the preliminary proposal, Shenzhen-based Vanke will issue new shares to Shenzhen Metro to acquire its unit SZMC Qianhai International Development. SZMC specializes in developing properties on top of metro hubs, and currently has two plots of land in the southern city of Shenzhen, Vanke has said.

“What we aim to achieve with the deal is a long-term and inseparable strategic cooperation,” Tan said. “Let me ask you, assuming there is no shareholding relationship, would they work with you without any second thought?”

China’s urbanization is “far from complete” with 56 percent of the population living in cities and towns, similar to the U.S. in 1945, Tan said. With major metropolitan cities growing rapidly, new urban districts extended along subway lines is the next key battlefield for Chinese developers, he added.

One parcel Vanke will acquire as part of the proposed deal is in Shenzhen’s Antuoshan area, and is expected to become a luxury residential project with two subway lines beneath, according to Vanke. Another, known as the Qianhai Hub project, will be built as a complex that’s similar in size to New York’s Rockefeller Center, with two city rails and three subway lines including one linked to Hong Kong, Vanke’s Tan said.

The Shenzhen Metro transaction would “enable Vanke to adopt a ‘railway + property’ business model, whereby the company could seize property development opportunities accompanying the fast development of metro lines in China,” Goldman Sachs Group Inc. analysts led by Wang Yi wrote in a note dated June 20.

Earnings Dilution

The “huge” new share issuance will dilute Vanke’s underlying profit this year by 6.1 percent to 1.67 yuan per share, and to 1.58 yuan in 2017, Citigroup Inc. property analyst Oscar Choi wrote in a June 19 note. He added that the deal will bring “solid” margins over the longer term.

Vanke said its board on June 17 voted seven to three in favor of the restructuring plan, with one director, Zhang Liping, abstaining because of conflict of interest. Zhang, currently employed by Blackstone Group LP, didn’t vote on the proposal because the two companies are in talks about a commercial property project, according to a Vanke exchange filing. China Resource opposed the legality of the vote, saying only members directly affiliated with the companies involved in the resolution -- in this case, Shenzhen Metro -- should be excluded from voting.

Vanke’s mainland-listed A-shares have been suspended since Dec. 18 amid the restructuring plan. The Shenzhen Stock Exchange on Wednesday asked Vanke for supplementary information on Zhang’s abstention. Vanke must submit a written response by Friday, the Shenzhen bourse operator said.

— With assistance by Emma Dong

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