In the second biggest merger in China’s brokerage sector, Beijing-based China International Capital Corporation has agreed to acquire Shenzhen-headquartered China Investment Securities for Rmb16.7 billion ($2.5 billion) from state investment company Central Huijin.
The deal — which could be seen as an asset injection, since Central Huijin is also CICC’s largest shareholder — allows CICC to bolster its strong investment banking business by tacking on China Securities' retail network.
The combination of the two institutions will create a goliath able to fight in China's fiercely competitive brokerage landscape. The two firms have around Rmb150 billion ($22.1 billion) of assets between them. The merger means CICC will be able to catch up with Citic Securities and Haitong Securities, leaders in retail brokerage as well as the onshore investment banking businesses.
According to the Securities Association of China, the respective asset value of CICC and China Investment Securities were Rmb73.6 billion and Rmb77.2 billion as of the end of June. This means that CICC has effectively swallowed a company bigger than it is.
Adding clients
China’s brokerage sector has become increasingly capital-intensive in recent years, following stronger participation from retail investors in the domestic stock market. Individual investors tend to use high leverage to maximize their returns, thereby offering huge business opportunities for local brokerages.
As such, it has become very much a balance sheet game as companies aggressively seek to raise capital in a bid to edge out their rivals.
But for CICC, the acquisition is not simply about shoring up its capital base. The deal also allows it to tap into China Investment Securities’ client list by accessing its extensive network of 192 branches in 28 provinces. It is perhaps the most important asset of all, given that CICC itself ran only 20 branches by the end of June.
A source familiar with the situation was bullish about the potential synergies. CICC counts investment banking and offshore business as its main income source, while China Investment Securities has a strong foothold in the domestic retail brokerage and SME business.
“There is not a lot of overlap between the two businesses so you can tell that the synergies are there to be exploited,” according to the source, who added that buying another brokerage was the quickest and most efficient way to expand CICC's retail presence.
CICC said the extensive and deep local connections of China Investment Securities could create significant cross-selling opportunities for its investment banking, equity sales and trading, fixed income, commodities and currencies and investment management businesses.
All-share deal
CICC will settle the buyout by issuing 1.68 billion unlisted new shares to Central Huijin at Rmb9.95 (HK$11.45) per share, which is largely in line with its market price. It represents a slight 0.6% discount to CICC’s last close of HK$11.62.
Since the new shares are not listed, the transaction will not increase the stock’s free float but it will imply a dilution of about 42% for existing shareholders.
An all-share deal will allow CICC to embark on such a large acquisition without stretching its balance sheet, the source familiar with the situation told FinanceAsia. In addition, an all-share deal also makes more sense to CICC because it can take advantage of the rich valuation of its shares.
At the current price, CICC's shares are trading at 1.35 times the company’s historical book value, a higher multiple than the H-shares of most other Chinese brokerage houses. By comparison, the $2.5 billion price tag values China Investment Securities at 1.13 times its book value of Rmb14.7 billion as of the end of June.
The all-stock deal is also seen as a better option to Central Huijin since it will increase its stake in CICC to 58.65% from 28.57%, thereby preventing any hostile takeover targeting the company, according to the source. Central Huijin’s stake in CICC was lower than its 30.4% free float before the acquisition, meaning that the company was vulnerable to potential hostile buyers.
China Vanke, the country’s largest residential developer by sales, was on the brink of a hostile takeover late last year after Baoneng Group aggressively boosted its stake within months.
Approvals
CICC’s acquisition of China Securities is only the latest high-profile merger in China's brokerage sector.
In 2014, Shenwan Hongyuan Securities was formed through a landmark $6.4 billion merger between Shenyin & Wanguo Securities and Hongyuan Securities, the largest ever M&A deal in the sector. In the same year, Guotai Junan Securities acquired a controlling stake in Shanghai Securities for $570 million.
CICC's latest move is subject to approvals from its shareholders, as well as regulators including the Ministry of Finance, China Securities Regulatory Commission and the Hong Kong Stock Exchange.
Central Huijin has applied for a whitewash waiver to avoid making a mandatory general offer for the remaining CICC shares. The mandatory general offer was triggered since Central Huijin’s shareholding will increase to more than 50% following the acquisition.
The merger is expected to complete before the end of June 2017.
CICC and ABC International are joint financial advisers on the transaction.
