ICBC faces possible minority tussle over HK unit

By Wei Gu
August 9, 2010

Chinese banking giant ICBC may be about to get a run for its money from small band of minority investors. Its plan to take full ownership of Hong Kong subsidiary ICBC Asia makes sense. But the unit’s minorities are in a strong position to make ICBC pay top whack.

ICBC already owns 72 percent of the unit. But it can’t grow its offshore business significantly without having 100 percent. Meanwhile, ICBC Asia needs more capital. For ICBC, the required investment doesn’t look like a problem. It’s the world’s biggest bank by market value and will soon get $6.6 billion from a rights offering.

The question is what the minority interest is worth. China Merchants Bank got investors excited by paying 3.1 times book value for Wing Lung bank in 2007 — an 82 percent premium over ICBC Asia’s current valuation on the stock market. But Wing Lung was sold in an auction at the top of the market.

Citic Group’s 2008 privatisation of its Hong Kong unit would be a more suitable comparison. The buyout was offered at 1.6 times historic book value, a 21 percent premium. A similar premium would value ICBC Asia $1.3 billion, or 2.1 times book value — higher than most small banks in Hong Kong. That price would be also 18 percent above the stock’s historical high.

Privatisation proposals in Hong Kong require that no more than 10 percent minority shareholders are in opposition. That could pose a problem for ICBC, as three funds alone make up of 26 percent of ICBC Asia’s minorities. ICBC can’t dilute their influence either, as Hong Kong listing rules require a minimum 25 percent free float.

Hong Kong has a history of minority tussles. In 2009, a court blocked a plan by tycoon Richard Li to take PCCW private. ICBC won’t want a big fight, and the cost of the deal is loose change — the cost would be just 5 percent of ICBC’s 2009 operating income. And if this bid fails, ICBC can’t make another for a year.

That said, the minorities aren’t likely to see a offer from anyone else. If they snub ICBC, they will be left hope the shares eventually trade above the value of the offer. It should not be too hard for ICBC to win them over.

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