Citic Securities, which is owned by the Citic group, a Chinese government-owned conglomerate, will buy $1 billion worth of 40-year convertible trust preferred securities in Bear Stearns that will convert to about 6% of Bear Stearns' outstanding shares. The conversion price is pegged to the closing price on five trading days up to and including October 19. Citic could potentially increase the stake to 9.9% though no details of this have been provided.
Bear Stearns will acquire a similar stake in Citic for $1 billion through a six-year convertible debt security. Bear Stearns will be allotted five-year options to acquire additional shares.
Citic and Bear Stearns will form a new 50:50 joint venture based in Hong Kong that will offer capital markets services across Asia. Bear Stearns will contribute its businesses in Asia including its operations in Hong Kong, Tokyo and Singapore to the JV. Citic will contribute its operations in Hong Kong and pay Bear Stearns a financial consideration.
The JV will offer a range of products, including cross-border mergers and acquisitions advisory, international equity and fixed-income capital markets deals with a focus on international offerings of Chinese companies and venture capital and private equity, asset management as well as local equity and fixed-income services.
In due course, each company is expected to have representation on the otherÆs board of directors.
ôThis ground-breaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies,ö says James Cayne, Bear Stearns chairman and CEO in a written statement. ôWe are confident that combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns' global client base and generate substantial new revenues and growth opportunities for the firm.ö
Indeed, the foothold Bear Stearns will get in China via the deal seemed to cheer investors as well. Bear Stearns gained about 1.2% during the course of the day's trading to $118.
Chinese whispers have been doing the rounds that Citic would invest in Bear Stearns. The US investment bank has been hard-hit by the subprime situation, and a cash-rich Asian investor seemed like an ideal solution. Indeed, the current announcement may have been precipitated by the rumours about the deal which were fuelled last week by confirmation by some key Chinese government officials.
But the nature of the agreement between Citic and Bear Stearns, with its cross-holdings and Asia joint venture, caught many market observers by surprise.
The deal is still subject to regulatory approvals in the US. The Bain-Huawei deal to acquire 3Com for $2.2 billion which was announced early this month has not yet received all necessary approvals. Some specialists suggest the timing may not be ideal for China Inc to propose another investment in the US.
But the circumstances surrounding the two deals are not strictly comparable. Some of the sensitivity surrounding the 3Com deal relate to sensitive software which the US government buys from the networking specialist firm.
In the Citic-Bear Stearns case, the structure of the deal seems to have been thought through to, among other things, reflect the reciprocity of the arrangement. Specialists suggest approvals will therefore be easier to obtain.
The deal follows just a fortnight after China Minsheng Bank announced it would buy 9.9% of California-headquartered UCBH Holdings. The deal was the first investment by a mainland Chinese commercial bank in a US bank. Experts have been suggesting that the way forward for China Inc in the short- to medium-term is cross-border minority stakes with a strong underlying strategic rationale. China Inc seems to buy into the thinking too.