Goldman Sachs sells ICBC shares

The US investment bank raises $1.9 billion by selling close to 20% of its stake at a 4.5% discount, just over a month after the lockup expired.

Goldman Sachs held out a month longer than Allianz and American Express, but last night the US investment bank finally sold close to 20% of its shares in Industrial and Commercial Bank of China (ICBC), raising HK$14.79 billion ($1.9 billion).

Its decision not to sell these shares immediately after the lockup expired on April 28, as did Allianz and Amex, meant Goldman was able to fetch 26% more for its shares than its two investment partners, thanks to strong gains in ICBC's share price since then. The stock has risen 27% since the sell-down by Allianz and Amex and the 4.7% jump yesterday took it to HK$5.11 -- its highest close since the collapse of Lehman Brothers in mid-September.

Part of this bounce can be explained by a general rebound in global equities markets -- the Hang Seng Index yesterday closed at an eight-month high of 18,888 points -- but ICBC has also likely been helped by the fact that the overhang from a potential Goldman sale was at least partially removed when the bank didn't sell straight away once the lockup expired. Representatives of Goldman said several times in April that the bank was in no rush to sell its ICBC shares and had no need to raise cash. The bank's position was reinforced in early May when the US Federal Reserve said that its stress test had revealed that Goldman did not require further capital to withstand an even more adverse market scenario.

In the end, Goldman still chose to offload the part of the ICBC shares that it has been entitled to sell since the end of April. The shares are held on a mark-to-market basis and thus the profit will be nowhere near the difference between today's share price and the actual price it paid three years ago. However, the sharp gains in the share price since the end of the first quarter, suggest that the sale will have a positive impact on Goldman's earnings in the second quarter. 

While some of the shares are held on behalf of clients, the cash could come in handy as the bank wants to repay the $10 billion that it received under the US government's Troubled Assest Relief Programme (Tarp) in October last year. As part of the deal, the government received perpetual preferred shares that pay a 5% annual dividend until November 2013 and 9% thereafter - interest costs that Goldman would rather be without. Banks that have received Tarp funds also face restrictions on staff compensation.

The shares were offered at a price between HK$4.80 and HK$4.90, which translated into a discount of 4%-6% versus yesterday's close, and ended up being priced at HK$4.88 for a 4.5% discount. According to a source, the deal was heavily oversubscribed and could potentially have priced a bit tighter, but in light of yesterday's strong gains, Goldman decided to leave something on the table for investors. The final price was equal to Friday's close of HK$4.88.

By comparison, Allianz and Amex sold their shares -- a combined 1.2% of ICBC's total share capital -- at a fixed price of HK$3.86, which represented a 4% discount to the market price at the time. That placement wasn't offered to the broader investment community, but was privately negotiated with a targeted group of investors and allocated to just under 20 accounts. The two companies each became allowed to sell 50% of their holdings in ICBC on April 28 and only about eight hours or so into that day, they announced that Goldman had helped them offload all of those shares through a placement totalling $1.92 billion. They will be allowed to sell their remaining ICBC shares from October 20 this year.  

Under the terms of its original investment, Goldman too was to be able to sell half its ICBC shares from April 28, but at the end of March, the US investment bank said it had renegotiated the lockup and agreed to hold on to 80% of its shares in the bank for another year -- leaving only 20% that could be sold from the end of April this year.

The new terms were agreed after the pending expiry of the lockup had resulted in ICBC underperforming both the wider market and its peers since the beginning of the year. The share price rebounded after the March announcement, which benefitted all three sellers. By the time Allianz and Amex sold their shares on April 28, the stock had added 12.3% and when Goldman sold yesterday, the gain had widened to 42.7%.

Yesterday's offering, which was arranged by Goldman Sachs on a sole basis, attracted close to 200 investors during the three hours that the order books were open. Demand was said to have been strong from all geographies, albeit skewed towards Asia. There was no immediate information on what type of investors bought the shares, except that they represented a broad range of accounts and that there was no one single investor who bought a big chunk of the deal.

Investors like ICBC, which, as the largest bank in China, is viewed as a proxy for the Chinese economy. Those who believe in a continued economic recovery should therefore have no trouble envisaging further share price gains. Recently, the stock has also been underperforming Bank of China, which may have been due to the lingering possibility that Goldman would still sell. The fact that this is now done could potentially allow for a catch-up rally, said one observer.

The sale comprised 3.03 billion shares, which made up about 0.9% of ICBC's total outstanding share capital and 3.7% of the H-share capital. It also accounted for about 18.3% of Goldman's entire stake -- just below the maximum 20% that it has been allowed to sell since the end of April -- and just under seven trading days, based on the average daily trading volume over the past three months. The US bank still owns approximately 13.6 billion ICBC shares, which it can sell from April 28, 2010. At today's market price, that portion is worth close to $9 billion.

Goldman, Allianz and Amex bought the ICBC shares before the Chinese bank's initial public offering in October 2006. Goldman invested a total of $2.58 billion, while Allianz and Amex put up €824.7 million ($1.08 billion at today's exchange rates) and $200 million respectively. This means that the latter two, which sold $1.6 billion and $318 million worth of shares in April, have already recouped more than their initial investments, while still holding half the shares. Goldman, which still has just over 80% of its ICBC shares left, has already recovered 74% of its initial investment.

At the time when Goldman announced the new lockup agreements, it and ICBC jointly reaffirmed that they will continue their strategic cooperation under the existing terms of the January 2006 agreement. These efforts are focused on sharing global best practices in areas such as credit, market and operational risk management, corporate governance, corporate and investment banking and asset management. 

ICBC recorded a 35.2% increase in net profit in 2008 to Rmb111.2 billion ($16.3 billion), supported by a drop both in non-performing loans and the cost-to-income ratio. Its total assets increased by 12.4% to Rmb9.75 trillion, its return on average assets improved to 1.21% and the return on weighted average equity increased by 3.2 percentage points to 19.4%. The bank said it strengthened its position as the world's largest bank by market value during the course of last year and also became the most profitable bank in the world. Over the past six years it has achieved a compound annual growth rate of 37.5% in net profit. 

Goldman's share price had quite a volatile session overnight following the share sale. It opened lower, traded up as much as 1.9% mid-session and then closed 0.2% lower at $144.33. Meanwhile, the Dow Jones index had a strong day and added 2.6%.

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