Citic Securities, China’s biggest stockbroker and one of its leading investment banks, will invest a total of $374 million to become a minority shareholder in Hong Kong-based brokerage and investment group CLSA and its European counterpart, Credit Agricole Cheuvreux.
CLSA and Cheuvreux are both owned by Credit Agricole Corporate & Investment Bank (CACIB), which is selling a 19.9% stake in each of them to the Chinese company, according to a release. The direct investment will give Citic Securities access to many of the world’s largest institutional investors, who are clients of CLSA and Cheuvreux, while CLSA will get a partner with extensive relationships in China that could potentially give it an edge over other international investment banks in this important market.
The agreement comes about 13 months after Citic Securities and Credit Agricole signed a memorandum of understanding to combine their global brokerage businesses as well as their investment banking businesses in China and the Asia-Pacific region. However, the nature of the deal has changed since then, particularly with regard to China.
The initial idea was to form a 50-50 joint venture between Citic Securities and CLSA in China involving research, broking, equity capital markets and financial advisory, and to merge Citic Securities’ offshore businesses, most of which are located in Hong Kong, into CLSA. But according to CLSA chairman and CEO Jonathan Slone, that plan encountered “significant legal and regulatory hurdles”.
“Citic Securities’ investment into CLSA and Cheuvreux through CACIB is a simpler solution and still offers [Citic] the benefit of access to global markets through our Asian and European distribution platforms, while providing us [with] a partner in China with direct access to China IPOs,” he said in a written response to questions from FinanceAsia.
This means that CLSA and Citic Securities will remain separate entities, although they said they will continue their discussions on how to collaborate further. The two firms started working together shortly after the initial agreement with the aim of making Citic Securities’ businesses more compatible with international best practices and, according to Slone, they are currently in discussions with regard to a couple of China IPO deals.
That said, CLSA will also continue to operate its existing China securities joint venture with Fortune Securities, in which it has a 33.3% stake. The Sino-foreign JV was set up in 2003 under regulations that were introduced as a result of China’s entry into the WTO and saw CLSA beat global investment banks like Goldman Sachs and UBS to it in terms of gaining access to China’s domestic markets. However, after being granted a brokerage licence for the Yangtze River Delta area in 2008, the JV changed its focus from underwriting primary equity and debt issues to brokerage and in February last year, it announced the impending launch of an A-share institutional research and broking business. It also changed its name to Fortune CLSA Securities from China Euro Securities.
Aside from UBS, which has a unique arrangement through its 20% direct investment into Beijing Securities (since relaunched as UBS Securities), no other Sino-foreign JV is currently able to trade in the secondary market. To qualify for a brokerage license, the JV has to have been in operation for at least five years.
CLSA said at the time of the February 2010 announcement that the goal was to build a China-focused, international standard, institutional broking and research business servicing domestic and international institutional fund managers, who wish to trade listed equities on the Shanghai and Shenzhen stock exchanges. But the JV does also have the ability to offer securities underwriting and sponsoring, and it still isn’t quite clear how that business will be affected by CLSA’s new partnership with Citic Securities.
At a first glace it does seem that Citic Securities’ investment will have bigger impact for the Chinese’s firm’s expansion overseas than for CLSA’s businesses in China, however. Citic has been eager to leverage its dominant position in its home market to grow offshore for some time and in 2007 agreed to set up an investment banking JV with Bear Stearns to cover China and Asia. However, Bear Stearns’ financial collapse and subsequent bailout by J.P. Morgan in March 2008 put a stop to those plans.
At present CLSA is 65% owned by CACIB, while the remaining 35% is owned by CLSA staff. Slone said the staff will continue to have the opportunity to buy into the new entity in a restructured share scheme. The structure of that scheme is under discussion and should be in place by January 2012 at the latest.
According to last week’s announcement, CACIB and Citic Securities aim to combine CLSA, which is mainly focused on Asia but has a growing presence in the US, with Cheuvreux, which is a pan-European equity research and broking business based in Paris, to create a global independent research-driven agency equity house.
Why this would be beneficial for Citic Securities as it tries to expand its business overseas is quite obvious, but Slone noted that fund managers who run global books also have a need for brokers with a global presence. A combined entity will make CLSA better placed to “inform on the trends, issues and fundamentals driving markets not just in Asia, but across the US and Europe”, he said.
CACIB and Citic Securities will also explore other areas or forms of business cooperation in the future, the two firms said. Citic Securities’ investment is subject to regulatory approvals and other customary conditions, but is expected to close by the end of this year.
The investment comes as Citic Securities is planning a stock market listing in Hong Kong in addition to its existing Shanghai listing. The firm is expected to raise about $3 billion later this year and has mandated ABC International, BOC International, Bocom International, CCB International, ICBC International and its own investment banking unit, Citic Securities International, to arrange the deal.
The Hong Kong IPO has attracted a lot of attention since Citic Securities will be the first company to give international investors direct access to China’s brokerage industry by seeking to list its entire company in Hong Kong. Other Chinese securities firms, such as Guotai Junan and Shenyin Wanguo, have chosen to list only their Hong Kong subsidiaries here.
Citic Securities has a market capitalisation of more than $19 billion and ranks as the biggest of China’s 107 securities companies.