A group of investors led by China-based Hopu Investment Management has agreed to buy all of the 13.5 billion shares in China Construction Bank that Bank of America has been allowed to sell since a lockup expired on May 7, people close to the transaction said yesterday.
The deal, which is valued at HK$56.7 billion ($7.3 billion), was privately negotiated on a principal-to-principal basis and follows hectic speculation and widespread rumours in recent weeks surrounding the fate of these same CCB shares, involving several other potential buyers and various other types of deals, including both private and public placements.
CCB's Hong Kong-listed shares, which fell 6.7% on Monday and another 2% in morning trading yesterday, bounced after news of the deal hit the screens during the lunchtime break yesterday and finished the day 1.6% higher at HK$4.98. The gains were likely due, at least in part, to some relief that the uncertainty about what was going to happen to the shares would be removed. However, confusion returned when BoA declined to comment on the deal yesterday and made no filing to the US Securities and Exchange Commission confirming it had sold the shares. BoA's shares fell 5.3% in US trading over night.
Investors in Hong Kong were also puzzled by talk of a separate sale of CCB shares yesterday morning through the capital markets, with some market participants claiming to have seen a term sheet from BOC International that was later withdrawn. However, sources said these shares were part of the BoA block and stressed that there was no other substantial seller in the market yesterday. BOCI was hired as an agent with regard to the crossing of the shares in the deal between Hopu and BoA.
According to one source, the Hopu-led group, which also includes Singapore investment company Temasek Holdings, China Life Insurance and one other domestic Chinese investor, paid HK$4.20 per share for the 13.5 billion shares, which make up about 6% of CCB's outstanding H-share capital. The price represents a 14.3% discount to Monday's closing price of HK$4.90, which is a little bit wider than the 12% discount achieved on a couple of the large bank blocks that changed hands through capital markets transactions in January. This seems reasonable given that this deal is 2.5 times as large.
CCB's share price has also had a good run, even with the confusion about a potential share sale, and before Monday's fall it had added 37.5% in the previous seven trading days. One explanation for the gains could be the suggestions, through rumours and press reports, that China Investment Corp, China's own sovereign wealth fund, would buy a large chunk of the shares from BoA -- an outcome that the market liked as CIC is supposed to be a long-term investor.
Meanwhile, Hopu has well-established links with CBB and Temasek is already a substantial shareholder in the Chinese bank. Hopu's founding chairman, Fang Fenglei, used to work at CCB before he teamed up with Goldman Sachs to run Gao Hua Securities; Hopu CEO Richard Ong helped Temasek make its initial investment into CCB three years ago when he was co-head of Asia investment banking at Goldman Sachs; and the firm's vice-chairman, Dominic Ho, used to be an auditor for the Chinese bank. The fund raised $2.5 billion from overseas investors, including Goldman Sachs and Temasek last year.
The source said part of the attraction of holding CCB shares, is that the bank is a good proxy for the Chinese economy and pays large dividends, which makes it a good defensive play. However, it was also important to the buyers that there are no other large blocks due to be released for sale in the near future that could act as an overhang and depress the share price. That last criteria was also key when Hopu bought about one-third of Royal Bank of Scotland's $2.4 billion exit from Bank of China through a placement in mid-January.
BoA will still own 25.6 billion shares, or 11.4% of the H-shares, after this deal, but those shares will be locked up until August 29, 2011.
The US bank sold 5.62 billion CCB H-shares through a placement to institutional investors in January at a price of HK$3.92 per share. The deal raised a total of $2.8 billion and ranked as the largest block trade in Hong Kong history. The bank had been widely expected to sell again after the partial expiry of the lockup last week -- especially after the US government's stress test revealed that it will need to increase its tier-1 common capital by $33.9 billion. However, representatives of the bank have said that BoA intends to remain a major shareholder and strategic partner of CCB and, on Monday, US-based media quoted the bank's CEO, Kenneth Lewis, saying: "We always want to have a very large ownership position (in CCB)."
Temasek held about 6.2% of CCB's H-share capital before this latest transaction, according to Hong Kong stock exchange data.
BoA bought an initial 9% in CCB for $3 billion in connection with its initial public offering in October 2005 and increased its stake to 19.1% in mid-November last year by exercising a series of options. At the time, CEO Lewis said that while the bank's stake in CCB is long-term and strategic, it would consider monetising part of its enlarged holding.