In an unusual move for Asian rights issues, Temasek has agreed to buy Bank of America Merrill Lynch’s entire entitlement of new shares in China Construction Bank’s ongoing rights issue. News reports in recent days had suggested that the US bank, which is the second largest shareholder in CCB with 11.4%, may not be interested in buying more shares, which had caused some concern that the $9.2 billion offering could end up undersubscribed.
BoA Merrill could have disposed of its nil-paid rights in the open market, but the agreement to sell them directly to Temasek should be positive for CCB since the latter is already a shareholder in CCB and is also expected to be in it for the long-term (it invested in the Chinese lender in connection with its IPO in October 2005 and hasn’t sold any shares since). In a statement filed with the Hong Kong stock exchange last night, CCB confirmed the sales agreement, which had been reported by Reuters earlier in the day, and said Temasek had agreed not to sell the H-shares that it can buy with the rights for at least three months.
Temasek already owns about 5.8% of CCB, which gives it the right to buy approximately 950 million H-shares through the rights issue. Together with the 1.79 billion H-shares it will be entitled to through the BoA Merrill nil-paid rights, its total take-up should be roughly 2.74 billion shares, which should cost it about $1.5 billion.
CCB is offering 0.7 rights shares for every 10 existing A- and H-shares and has set the price at HK$4.38 per new H-share and the equivalent Rmb3.77 per A-share. When the offer was announced last Monday night, the H-share price represented a 42.7% discount versus the latest close of HK$7.64 and a 41% discount to the theoretical ex-rights price (Terp) which was estimated at HK$7.43.
Assuming the rights issue is completed in full, BoA Merrill’s stake in CCB will be diluted to about 10.2%, while Temasek’s stake will rise to about 6.5%.
Bank of America bought an initial 9% in CCB for $3 billion in connection with the bank’s IPO in October 2005 and increased its stake to 19.1% in mid-November 2008 by exercising a series of options. Since then, however, the US bank has been monetising part of its holdings through a couple of large block trades.
In January 2009 it raised $2.8 billion by selling 5.62 billion shares and in May last year it divested 13.5 billion shares to a group of investors led by China-based Hopu Investment Management, raising another $7.3 billion. Its remaining 25.58 billion shares are locked up until August 29, 2011, and given that it is expected to continue to sell after that lockup expires it isn’t too surprising that it has decided not to buy any more shares at this point.
Central Huijin Investment, which is the largest shareholder in CCB with a 48.2% stake has said it will take up its full entitlement of A-shares.
The H-share portion of the deal will be fully underwritten by Bank of America Merrill Lynch, BOC International, CCB International, China International Capital Corp, Citic Securities, Credit Suisse and Morgan Stanley in their capacity as joint lead underwriters and joint bookrunners. The A-share portion of the deal isn’t underwritten and will need a subscription rate of at least 70% in order to proceed.
The record day for the H-share offering is November 16 and the subscription period will run from November 19 to December 8. Shareholders who want to sell their rights in the market can do so between November 23 and December 3.
The news came as Industrial and Commercial Bank of China confirmed that it will seek to raise up to Rmb44.948 billion ($6.8 billion) through a rights offering of A- and H-shares in the coming weeks. This means there are now three rights issues by Chinese state-owned banks taking place virtually simultaneously. Aside from ICBC and CCB, Bank of China is also seeking to raise up to $9 billion
ICBC said in an announcement that it will offer 0.45 rights share for every 10 existing shares, slightly fewer than the offer of 0.6 for 10 that it flagged when it first announced the rights issue at the end of July. If taken up in full, ICBC will issue 11.29 billion new shares. The subscription price will be HK$3.49 per H-share and the equivalent Rmb2.99 per A-share, after adjusting for the exchange rate. Like BOC and CCB, it will use the proceeds to strengthen its capital base following last year’s lending binge and ahead of new regulations that will require banks to hold more tier-1 capital.
The H-share price represents a discount of approximately 47.4% to Wednesday’s closing price of HK$6.63 and a 46.2% discount versus the theoretical ex-right price of HK$6.49, based on the same close.
The H-share tranche is fully underwritten by joint lead underwriters BNP Paribas, BOC International, ICBC International and UBS; and by co-lead underwriters Credit Suisse, HSBC, Bank of America Merrill Lynch and Nomura. UBS and China International Capital Corp are joint sponsors for the A-share tranche. Similar to CCB (and BOC), the A-share portion of the deal is not underwritten and needs a 70% subscription rate to proceed.
Some 24.9% of the right issue will be sold in the form of H-shares and the remaining 75.1% in the form of A-shares. Huijin, which owns 35.4% of ICBC will take up its full entitlement, according to the ICBC announcement.
The record date for the H-share issue will be November 26 and a prospectus will be issued on November 29. The nil-paid rights can be bought or sold in the open market from December 1 to 13. The deal closes on December 16.