Temasek has helped BoA Merrill with its CCB investment three times (AFP)
Temasek Holdings confirmed in a filing with the Hong Kong stock exchange on Monday that it bought part of Bank of America Merrill Lynch’s stake in China Construction Bank, sold through a private transaction a week ago.
The Singapore investment company said it bought 4.4 billion of the H-shares, or about one-third of the 13.1 billion shares that BoA Merrill sold, at a price of HK$4.94 apiece. This means it spent about $2.8 billion. The acquisition increased its share of the Chinese lender’s H-share capital to 8.1% from 6.27%.
Temasek’s involvement in the $8.3 billion sell-down was reported by some international media the day after the August 29 transaction and has helped to support CCB’s share price in the wake of the deal as the long-term nature of most of its investments suggests it will add stability to the stock. However, the share price likely also reacted to the removal of the overhang that BoA Merrill’s pending divestment had put on the stock since the potential of a sale was first reported in June.
CCB’s H-shares rose 5.2% in the first three days amid a general recovery in the Hong Kong market to a close of HK$5.84 on Thursday last week. They then dropped again as global markets took another turn for the worse, with banks generally leading the decline. Following Temasek’s filing, the share price gained 1.1% to HK$5.59 yesterday. The Hang Seng Index finished up 0.5%.
This is the third time that Temasek has helped BoA Merrill with regard to its CCB investment. In November last year it bought the US bank’s entire entitlement in a CCB rights issue, which gave it the right to buy 1.79 billion additional H-shares at a total cost of $1 billion. Temasek also spent about $530 million taking up its own entitlement in the rights issue.
And in May 2009 it was part of a group of four investors who bought a combined 13.5 billion CCB shares from BoA Merrill as it was trying to rebuild its balance sheet following the financial crisis and the acquisition of Merrill Lynch. That deal, which was also privately negotiated, amounted to $7.3 billion and like this latest transaction came immediately after the expiry of a lock-up.
Perhaps because of that, there had been speculation that the Singapore investment company would step in and help BoA Merrill once again as the US bank needed to cut its stake as part of a wider effort to boost tier-1 capital and reduce its risk-weighted assets. By bringing its stake in CCB below 10%, BoA Merrill will also avoid the restrictions that the proposed Basel III guidelines place on capital that represents an ownership greater than 10% in other financial institutions. Last week’s sale accounted for about 5.2% of CCB’s total share capital and reduced BoA Merrill’s stake in the Chinese bank to about 5%. Its share of the H-share capital is about 5.2%.
However, this latest investment shows a side of Temasek that isn’t often seen. In fact, its recent transactions in the CCB stock makes it look almost like a hedge fund looking for short-term gains.
Just two months ago, it sold 1.502 billion shares in CCB through a $1.2 billion block trade that was priced at HK$6.26 per share. And now, it has bought 4.4 billion shares at a significantly lower price of HK$4.94 per share. As CCB’s share price was expected to remain under pressure until BoA Merrill came out and sold its shares (its holdings were subject to a lock-up that expired on August 29), Temasek could have been reasonably sure that it would be able to buy back the shares it sold at a cheaper price. It’s hard to argue with an investment company that manages to “buy low” and “sell high”, but the fact that these two transactions are so close in time suggests that Temasek is becoming more aggressive about increasing its returns.
However, it is worth noting that in this case the sale came before the buy, which raises the possibility that perhaps Temasek never intended to sell down its stake in CCB in the first place. The sale accounted for just 8.5% of its holdings in the bank and 0.6% of CCB’s outstanding H-share capital.
Indeed, according to a source, the July block trade was suggested to it by Morgan Stanley, which indicates that the bank had seen a demand for the stock among its clients that it was keen to help fill through a block transaction. Temasek also sold $2.4 billion worth of H-shares in Bank of China on the same night. Both blocks were arranged by Morgan Stanley on a sole basis.
At a media briefing to announce its annual financial review a few days after the sell-downs in BOC and CCB, Temasek’s managing director of investment, Nagi Hamiyeh, referred to the sell-downs as “a periodic rebalancing of the portfolio” and stressed that China makes up about 20% of its overall investments and remains the firm’s leading investment destination. “We are still looking at investments in China and we are very comfortable with our position there,” he said.
Temasek first bought shares in CCB in connection with its IPO in October 2005. Before the July deal, it had reduced its stake only once, through a $255 million block trade in November 2007.
Last week’s transaction, which accounted for just over half of BoA Merrill’s stake in CCB, was completed at an 11% discount versus the latest closing price of HK$5.55, while Temasek’s sale in July was priced at a 3.4% discount.
There has been no confirmation of who bought the rest of the shares in last week’s deal and since the total deal size accounted for just 5.4% of the H-share capital and Temasek bought about one-third of it, it is unlikely that any of the other investors would have to disclose their purchase (holdings below 5% of the share capital don’t need to be disclosed). The only other investor who owns more than 5% of CCB already is the Chinese government.
The Financial Times on Monday quoted several unnamed people familiar with the deal as saying that a Chinese consortium bought the biggest portion of the deal. The consortium included the State Administration of Foreign Exchange, the National Social Security Fund and Citic Securities. The report also named a Qatar sovereign investment fund as one of the buyers.
Separately, Temasek will spend about $95 million to buy shares as part of Singapore-listed CitySpring Infrastructure Trust’s S$210.2 million ($174 million) rights issue. Temasek, which owned 27.8% of the trust before the rights issue, had committed to backstop the offering up to 85% in case of insufficient demand from other shareholders. And according to a company announcement, Temasek will be allocated 54.66% of the deal.
CitySpring said that including Temasek’s commitment to take up 85%, the 11-for-20 rights issue was 130.3% subscribed. The issue was arranged by DBS, Goldman Sachs and Morgan Stanley, which also underwrote the remaining 15% of the deal.
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