Vanke Sees $10 Billion Erased as Takeover Battle Loses Sway

  • Regulator cracks down on insurers’ leveraged acquisitions
  • Stock has fallen most on MSCI China Index this month

Shares of China Vanke Co. are tumbling as a crackdown on leveraged buyouts complicates a takeover battle for the nation’s largest listed property developer.

The Shenzhen-based company has plunged 23 percent in Hong Kong this month, the biggest loser among the 149 members of the MSCI China Index, to erase $10 billion of market value. Vanke rallied earlier amid a rare public battle for control of one of China’s biggest companies. China Evergrande Group emerged as a surprise entrant this year after insurance unit of Baoneng Group built a sizable stake in 2015.

Such acquisitions turned politically less sound this month when the head of the country’s securities regulator used the word "robbers" to describe insurers that used leverage to buy shares in listed companies, and the insurance regulator said it would tighten scrutiny of the practice and toughen rules. Evergrande’s president said on Saturday that the company doesn’t plan to become Vanke’s controlling shareholder.

"All the news for them is bad," said Raymond Cheng, a property analyst at CIMB Securities Ltd. "Previously shares were up a lot because Evergrande kept buying. Now they are under a lot of pressure." 

A slowdown in the country’s property market is adding to investor concern about the stock. Vanke’s President Yu Liang this month predicted that national home sales will drop “significantly” in the coming year, while prices will fall in cities where gains were too fast. The stock slumped 2 percent on Tuesday in an eighth day of declines, its longest losing streak in more than two years.

Evergrande boosted its stake in Vanke to 14.1 percent last month, bringing its total expenditure on Vanke’s Shenzhen-traded shares to about 36.3 billion yuan ($5.2 billion), even after the city’s stock exchange said it was closely monitoring Evergrande’s investments. Chinese law requires owners of a 30 percent stake to make a general or a partial offer for the target company.

Still Expensive

Baoneng overtook state-owned China Resources (Holdings) Co. late last year as the biggest Vanke shareholder, amassing a combined 25.4 percent in the company’s mainland and Hong Kong-listed shares through Foresea Life and other units. China Resources owned 15.2 percent of Vanke’s combined shares as of Sept. 30, according to regulatory filings.

Vanke shares are still too expensive after the rout, given government probes into insurers’ acquisitions, according to GF Holdings (Hong Kong) Corp. The stock trades at 1.8 times net assets, almost twice that of rival China Overseas Land & Investment Ltd.

"Liquidity will be negatively affected," said Dennis Yao, an analyst at GF Holdings in Hong Kong. There won’t be further inflows "to support Vanke’s stretched valuation," Yao said.

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