Morgan Stanley gets approval to sell CICC stake

The US bank expects to reap a $700 million capital gain from the sale of its 34.3% stake to TPG, KKR, GIC and Great Eastern Life.

Morgan Stanley has received all the necessary approvals from the Chinese regulators to sell its 34.3% stake in China International Capital Corp (CICC) and expects to realise a pre-tax gain of about $700 million from the transaction. In a press release issued last night, the US investment bank also confirmed that the buyers are TPG Capital, Kohlberg Kravis & Roberts (KKR), The Great Eastern Life Assurance Company and the Government of Singapore Investment Corp (GIC).

The first three investors are new to the Chinese investment bank, while GIC was one of the founding shareholders and already owns a stake. The price of the transaction wasn’t disclosed.

The sale will open the door for Morgan Stanley to pursue its long-standing ambition to set up a securities joint venture with China Fortune Securities (also known as Huaxin Securities) that will give the US firm more direct access to China’s domestic markets. The understanding is that the Chinese regulators didn’t want to give Morgan Stanley approval to invest in a second Chinese securities firm as long as it still held a stake in CICC.

Morgan Stanley set up CICC as a joint venture with China Construction Bank in 1995 and was closely involved with its rise to a full-fledged investment bank with operations similar to those of an international firm. In the early days, Morgan Stanley provided a lot of talent to the JV, but in 2000 it gave up management control and since then has basically been collecting revenues in proportion to its 34.3% stake without having any influence on the business.

This has meant that Morgan Stanley, from being involved in the pilot project that laid the foundations for the opening of China’s capital markets to foreign players, has been forced to watch from the sidelines as a growing number of other international investment banks, including Goldman Sachs, UBS, Credit Suisse and Deutsche Bank, have set up JVs in China and started to do business in the country’s lucrative A-share market.

To meet the demands from the regulators, Morgan Stanley has tried to sell CICC to private equity investors for years, but hasn’t been able to reach an agreement on price. In late 2008 a sale seemed quite close, but then the financial crisis hit and the plans were postponed yet again.

The China Securities Regulatory Commission accepted Morgan Stanley’s application to set up a JV with Fortune Securities at the end of November and, with the sale of the CICC stake out of the way, it will be expecting a formal approval to follow. The CICC transaction is expected to close before the end of this year.

“Given the impressive economic and market developments and business opportunities, China remains a critical part of Morgan Stanley’s global strategy. Our focus now is to further expand our domestic market platform and capabilities,” James Gorman, the bank’s president and CEO said in the release.

“We are honoured to have partnered with CICC,” added Wei Sun Christianson, Morgan Stanley’s China CEO. “We have enjoyed witnessing its growth and development, and we celebrate its achievements in establishing itself as a leading investment bank in China. We wish CICC every success in the future."

Meanwhile, CICC chairman Li Jiange noted that the change of the firm’s shareholders will have a “very positive” strategic impact on CICC and benefit its long-term development. “The introduction of some of the most prominent international institutional investors will help CICC in its future business development and international expansion,” he said.

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