In a landmark transaction, Citic Securities has agreed to buy CLSA Asia-Pacific Markets for just over $1.25 billion. It is the first big acquisition of a foreign broker by a Chinese competitor, and is indicative of the advance of Chinese financial institutions while European firms retreat to restore their balance sheets to meet stricter regulatory rules.
The leading state-controlled firm, advised by Credit Suisse, has paid $310 million to Credit Agricole for a 19.9% stake in the Hong Kong-based broker. The French bank has a put option to sell its remaining 80.1% interest in CLSA to Citic for $942 million, subject to regulatory and shareholder approvals.
The sale values CLSA at a price-to-book ratio of 2.23 times, based on the firm’s 2011 accounts, which is at the high end of valuations for comparable brokers, but reflects the transitional services that CLSA will provide, according to a person familiar with the deal. In general, brokers’ revenues and commissions have suffered from depressed markets, regional competition and cost-cutting by institutional investors.
Last year, Citic offered $374 million to purchase 19.9% stakes in both CLSA and Credit Agricole’s Cheuvreux brokerage unit, before changing tack in March and focusing solely on the CLSA business. That would have implied a $1.87 billion price tag for 100% of both firms, although Cheuvreux was struggling to make money. Last week, Credit Agricole entered exclusive talks to sell Cheuvreux to Kepler Capital Markets.
Back in 2007, Citic had a narrow escape when the Chinese regulators delayed approval for its plan to invest $1 billion in a venture with Bear Stearns to focus on overseas IPOs of Chinese companies. The US investment bank collapsed during the following year.
Arguably, the acquisition of CLSA makes a better fit anyway. Citic, which is listed on both the Hong Kong and Shanghai stock exchanges, has strong corporate relationships in China, but needs the global distribution network and access to international markets that a well regarded brand can provide, said the person.
It should provide an opportunity for Citic to grow its share of the lucrative IPO market in Hong Kong, where listings by volume have been the biggest in the world during the past three years.
“The investment in CLSA will enable Citic to partner its strong franchise in China with CLSA’s established global clientele and bring capital market products and services from China to international clients,” noted Wang Dongming, chairman of Citic, in a joint statement with CLSA on Friday evening. “At the same time, Citic and CLSA, through our respective proven platforms, will offer market leading servicing capability for global clients who wish to access China.”
CLSA has an extensive worldwide investor client base, specialises in Asian equities and employs around 1,500 professionals, including highly rated analysts respected for their independent views. The strength of the firm’s proven brand perhaps distinguishes it from the Asian units of Royal Bank of Scotland, which were sold earlier this year but failed to attract Citic’s interest.
“After more than two years of discussion and planning, CLSA very much welcomes Citic as a shareholder,” said Jonathan Slone, chief executive of CLSA, in the statement. “Both Citic and CLSA share a common vision to provide our clients a globally integrated service driven by a culture of innovation, integrity and independence. Having Citic as a shareholder will allow CLSA to broaden our product offering and global expertise while maintaining our unique and successful position as a content driven independent agency broker.”
Inevitably, there will doubts about whether Citic can retain the best of the CLSA staff. To help ease concerns, initially the existing CLSA management personnel and structure will be maintained before the two firms are more closely integrated, and a share incentive scheme might also be introduced, according to that person.
The full acquisition is expected to be completed by June 30, 2013. Credit Agricole owns 65% of CLSA, and the broker’s staff own 35%. In addition to the usual approvals, it will need the agreement of the French labour unions.
Shares of Credit Agricole, France’s third-biggest bank, dropped 6.4% on Friday, compared with a 3.7% decline of the European sector index, and have fallen 26% so far this year, according to Bloomberg.
