Goldman sells ICBC shares worth $2.25 billion

Goldman Sachs gave the market a bit of a surprise last night with another partial sell-down of its stake in Industrial and Commercial Bank of China. But investors were quick to catch on and, despite being the second largest block in Hong Kong this year, the deal was fully covered in just half an hour.

The final demand allowed the deal to be upsized by just over 10% and saw Goldman reap a total of HK$17.46 billion ($2.25 billion).

The deal, which accounted for 23% of Goldman’s remaining stake, was also priced at quite a tight discount of 3.9% versus the yesterday’s close of HK$5.97, even though the share price had gained 2% during the day. However, the discount was wider than on the other two large blocks this month – Vodafone’s $6.5 billion exit from China Mobile and Newbridge’s $1.2 billion sell-down in Ping An Insurance (Group) – which came at discounts of 3.2% and 1.2% respectively. The key difference versus those two deals was that last night’s trade was not subject to competitive bidding by the wider investment banking community – a move which tends to result in tighter discounts as banks that are keen to get mandated on large deals have a habit of bidding aggressively. As with most other block trades involving its own investments, Goldman handled this one on its own.

That said, the block trades for both China Mobile and Ping An were both successful and there were no signs that the market felt the discounts were too tight. In fact, on the Ping An block, Morgan Stanley, as the sole arranging bank, was able to push the discount to the tight end of the range after receiving orders for more than three times the deal size.

Last night’s ICBC trade was also priced below the maximum indicated discount and, according to a source, the deal was heavily oversubscribed by a large variety of high-quality investors, including local tycoons and institutional accounts that were already on the company’s roster of shareholders. The allocations were top-heavy with 10-15 investors taking about 60% for the deal.

Goldman initially offered 2.75 billion H-shares, which was later increased to approximately 3.04 billon. The final size accounted for 0.9% of ICBC’s total outstanding share capital and 3.7% of the H-share capital. The offer price ranged from HK$5.70 to HK$5.79, which equalled a discount of 3.0% to 4.5%, and was fixed at HK$5.74.

Even though the deal wasn’t priced at the top and, despite the fact that Chinese banks listed in Hong Kong have underperformed the wider market this year amid concerns about the effects of last year’s lending binge and the huge amount of sector supply that was set to hit the market, Goldman received a slightly higher return on these shares than on its first sale of ICBC shares in June last year. At that time, the US bank sold 3.03 billion shares at HK$4.88 apiece, which represented a 4.5% discount to the latest market price.

After a poor first half, ICBC’s share price -- like that of its peers -- was given a boost by the successful listing of Agricultural Bank of China, but has pretty much range-traded since then. However, since its last low point on August 26, ICBC’s share price has gained 7%. The confirmation that both ICBC and Bank of China will raise their much needed capital through rights issues rather than through follow-on sales to the market as a whole has also helped support the Chinese banks as it has meant a significant reduction of new bank paper. ICBC last week got shareholders’ approval for a rights issue of up to Rmb45 billion ($6.6 billion), which is expected to hit the market later this year.

Goldman has been free to sell its remaining shares in ICBC since the end of April this year, when its final lockup expired, and while there was no word last night about why it chose to sell now, it is noticeable that the sale is coming just before the end of the third quarter. Hence it may be part of a wider risk management exercise by the US bank in time for the upcoming earnings release.

Goldman, Allianz and American Express bought shares in ICBC before the Chinese bank's initial public offering in October 2006. Goldman invested a total of $2.58 billion, while Allianz and Amex put up €824.7 million ($1.11 billion at today's exchange rates) and $200 million respectively. Goldman will still own about 10.14 billion ICBC H-shares after this transaction, which accounts for about 12.3% of the total H-share capital and is worth about $8 billion at current share prices.

Amex is believed to still hold about 638 million shares, or 0.8% of the H-share capital, while ICBC’s latest annual report suggests that Allianz sold its remaining stake sometime last year. Once a shareholder owns less than 5% of a company, they are no longer obliged to disclose their dealings in the stock.