China's reform has been heralded as a goldmine for investment banks, as the prospect of helping lumbering state-owned giants introduce private capital, reshuffle assets and restructure inefficient businesses offers an unprecedented opportunity for banks hungry to boost fees.
But there has been little evidence of this in Sinopec's recent $17.4 billion sale of a near 30% stake in its retail unit, which includes a sprawling network of more than 30,000 petrol stations and 23,000 convenience stores.
The sale was highly anticipated. In April, Sinopec hired foreign banks Bank of America Merrill Lynch and Deutsche Bank alongside Chinese firms CICC and Citic Securities as financial advisers, but thereafter the deal was dominated by China Inc.
The 25 investors, which are ultimately all linked to China and are mostly financial firms, include affiliates of Bank of China, China Cinda Asset Management, private equity fund Hopu, Haier Electronics, China Asset Management, Fosun International and ENN Energy Holdings.
According to a source familiar with the matter, hardly any of the winning bidders hired advisers. A number of international investors had formed large consortiums and hired buyside advisers but most of them dropped out after the first round.
Among the 25 mainland investors, some will be tapping banks for funding but according to a second source familiar with the matter, they are expected to lean heavily on mainland lenders, which have offered attractive terms and covenant-lite structures.
While the details of the financing are still being hammered out and there could be an opportunity for foreign lenders to play a role, the attractive terms offered by the mainland banks will be hard to match. Foreign lenders are more likely to demand covenant packages, which will be difficult for mainland investors to meet as they do not have control over the cashflows or dividends of the retail unit, known as Sinopec Sales.
Foreign investors too, have been left out, or found themselves priced out by mainland investors that were less sensitive to issues of control. Sinopec had softly guided investors that board seats would be given but would be contingent on the size of the funds investors committed and this would be worked out later, which put many foreign private equity firms off, the second source said.
Board seats were highly prized as they were seen as the only way to exert influence. As a result, a number of foreign private equity firms joined hands with limited partners in the hope of garnering board seats. As it stands, not a single investor has a stake of more than 2.8% in Sinopec (which required an outlay of a hefty $1.6 billion), which means that it will be hard for any single investor to exert control.
Sinopec's shares have slumped 10% since the news of the stake sale was announced and some analysts attribute this to disappointment over the composition of investors.
"We believe the consortium of investors also disappointed as it lacked an anchor operator and did not attract non-China investors," said Jefferies in a research report on Tuesday.
Taiwanese convenience store Ruentex, which has an agreement to jointly operate 300 stores with Sinopec would have been an obvious choice as an anchor operator, but evidently was unwilling to be an investor.
If Sinopec's sale is anything to go by, the main winners of China's reform could well end up being Chinese banks and investors.