Hong Kong’s subway operator, Mass Transit Railway Corp, has invented perhaps one of the world’s most successful business models by selling land above or adjacent to its railway stations to property developers.
Across the Sham Chun River, China Vanke wants to kill two birds with one stone by adopting this “railway plus property” model in Shenzhen to quickly increase its land bank and, more importantly, fend off a hostile takeover attempt by Baoneng, a little-known financial conglomerate.
Baoneng, which is controlled by low-key founder Yao Zhenhua, became China Vanke’s largest shareholder in December after building up its stake in less than six months.
Soon after, Vanke chairman Wang Shi (pictured) publicly voiced his discontent, questioning Baoneng’s credibility.
“Our reputation is Vanke’s biggest asset,” Wang said at an internal meeting on December 17. “The background of Baoneng may lead to a change in our credit rating, which [has helped] us to secure inexpensive funding internationally and domestically.”
On December 18 Baoneng hit back, calling the group’s share purchases entirely legitimate and emphasising that it believed strongly in market forces.
Public documents show that Vanke, which is listed on both the Hong Kong and Shenzhen stock exchanges, has net assets of Rmb136.3 billion ($21 billion) compared with Baoneng’s Rmb120 billion.
Investors first got wind of a possible takeover battle in July of last year when Vanke announced that Foresea Life Insurance had acquired more than 5% of its shares. By late August, Baoneng, through its subsidiaries Foresea Life Insurance and Shenzhen Jushenghua, had bought more than 20% of Vanke, a level that made it the biggest shareholder of Vanke, surpassing state-owned China Resources Group. At the last count, it had a combined 24.26% stake to China Resources’s 15.29%.
Baoneng’s stake building in China’s largest homebuilder wowed investors, as it marks a new milestone in the history of corporate China, with a private company trying to wrest control from a state-owned enterprise.
China Resources had been Vanke’s largest shareholder until last August and had been so for about 15 years. Vanke effectively brought in China Resources in 1999, five years after fending off another takeover attempt, this time by a consortium led by Junan Securities, which later merged with Guotai Securities.
Through its partnership with China Resources, Vanke gained more financial firepower to expand nationwide, and with considerable success too. The company’s Shenzhen share price has jumped by more than 38 times since 1999, compared with a 5.6 times increase in the Shenzhen Composite Index over the same period.
Hostile takeovers are pretty rare in China because most companies are controlled by either the state or by single tycoons or families, which makes the Vanke drama all the more intriguing. The cultural preference also is for closed-door negotiations rather than public confrontation.
“The great thing about seeing a transaction like that [is that it shows] the market is getting more competitive,” David Blumenfeld, a partner at law firm Paul Hastings, told FinanceAsia.
“Ten years ago, a situation like that wouldn’t happen without discussions with the government regulators,” he said. “Now it appears to be less and less so.”
In China, Vanke and its founder Wang Shi are household names. Vanke started off as a trader of animal feed in 1984, when the government first started under Deng Xiaoping to encourage private businesses as part of the “reform and opening” experiment.
Today Vanke is China’s biggest homebuilder with a market capitalisation of Rmb172 billion ($27 billion). Its property sales jumped by 32.5% year-on-year to a record Rmb179.3 billion in 2015.
Wang, who has twice scaled Mount Everest, is often referred to as one of the most charismatic Chinese businessmen. He is also proud of his management style, professing to have never bribed any officials or hoarded land to bid up house prices, historically common practices in the Chinese real estate industry.
But now, at the age of 64, Wang is embroiled in a struggle for control of the company he founded.
The battle is still ongoing. Shareholders of Vanke agreed on March 17 to extend the suspension of its Shenzhen-listed shares for a further three months.
However, China Vanke’s second-largest shareholder, state-owned China Resources, then said on March 19 that the manner in which Vanke had struck a deal with Shenzhen Metro Group was not ideal as it should have informed the board members.
Vanke said a non-binding agreement did not need board approval, raising a question mark over whether China Resources will support the proposed $9.3 billion acquisition when it eventually comes to a vote.
In a preliminary accord signed by the two parties on March 13, Vanke said it would acquire Shenzhen Metro Group’s property projects, mostly atop subway stations in the booming tier-one city.
Vanke intends to fund the deal by issuing new shares worth as much as Rmb60 billion ($9.25 billion), potentially making the state-owned firm its white knight with 20% of the enlarged share capital. According to Credit Suisse’s calculations, that would then leave Shenzhen Metro as Vanke’s new No.1 shareholder.
Vanke vice-president Tan Huajie said at a Hong Kong media briefing after the deal was announced that the partnership with Shenzhen Metro Group would allow Vanke to backfill a scalable portfolio at a reasonable price.
Shenzhen had 131 metro stations at the end of 2015 and plans to increase that number to 371 by 2030.
Tan said land prices in tier-one cities such as Shenzhen had surged significantly in the past six months as that land prices atop metro stations are more resilient in case of crashing markets.
The deal is still subject to approval from shareholders as well as from other government bodies including the State-owned Assets Supervision and Administration Commission and the China Securities Regulatory Commission. Should Vanke get the green light from all of them, then Credit Suisse expects the share placement to take place in both Shenzhen and Hong Kong.
But everything is still to play for. How the saga unfolds will test Beijing’s willingness to allow market forces to determine outcomes, something President Xi Jinping has repeatedly said he favours. Should Vanke fail in its defence, enabling Baoneng to gain boardroom control it would encourage other potential predators to try their luck with other Chinese companies.