bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Shirley Yam

China is never short of a murky deal or two. But when it involves the largest bank in the United States, HK$56.74 billion worth of shares and a man who counts the deputy premier as a mentor, that still raises some eyebrows.
I am talking about the sale of a stake in China Construction Bank Corp by its capital-strapped strategic investor, Bank of America Corp, on Wednesday.
Before dealing with the murkiness, let's have some idea of the normal practice first.
It should start with a boss-to-boss call between the seller and one or two international investment banks. The bankers will then sound out the deal to a few of their people or even to a handful of potential buyers for an indicative price.
Then, once the seller agrees on the price, the sale will go ahead and hopefully be completed in one or two days. The reason for this is that the longer the sale takes, the more the leakage and the greater the risk of price manipulation at a disadvantage to the seller.
Potential buyers will get a term sheet, stating the number of shares available and the price range. The clarity allows for a good estimation of the risk and a better price fixing.
That's what most people and even bankers assumed with the Bank of America deal. Given the bank's financial condition, the need to sell down Construction Bank had long been written on the wall. And given the  drought in the capital market and the size of the deal, everybody wanted in. But as they approached Bank of America or fished for a price with the fund managers, the answer they got was: 'Talk to Hopu.' 
The name is probably unfamiliar to most people outside China's financial world.
But Hopu Investment Management is no ordinary firm. It is a US$2.5 billion private equity firm established by Fang Fenglei, a mainland banker whose connections go as high as Vice-Premier Wang Qishan and include Dominic Ho, a former KPMG partner, and Richard Ong, a former Goldman Sachs banker. Among its investors are Goldman and Temasek Holdings.
Mr Fang has made possible many 'impossible' deals. Among them, the establishment of a Sino-foreign securities house in 2005 that gave Goldman the sort of control rivals could only dream of. In short, he is the ultimate dealmaker in China.
Yet, the choice is still puzzling. Hopu holds no brokerage licence in Hong Kong, according to the Securities and Futures Commission website. That means it cannot possibly do any underwriting business in the city. So, why did it have a role in a share sale here?
Hopu acts more like a sole agent. It dished out stakes to underwriters with orders.  Among them were  influential ones such as Goldman, UBS, Bank of China International and  China International Capital Corp. In some cases, it even lined up buyers and told the underwriters who to call.
The whole process was done with little transparency. Even the size of stake available kept changing. 'It's like there is a stake this morning, then there isn't in the afternoon, then the morning after it's available again,' said an insider.
Hopu charges dearly for this service. Some buyers had to pay as much as 3 per cent of the stake bought. Normally, an underwriter will charge the seller 2.5 per cent and the buyer 0.25 to 1 per cent, depending on the difficulty of the deal.
The result  is that the deal took  almost a week to complete with negotiations started early last week and the shares not sold until Wednesday.
Why the murkiness. There are two explanations. The critics talk of a  lack of expertise. Given its size and the volatility of the market, the deal is challenging to even an international broker, not to mention a firm such as  Hopu.
Others see it as a strategy. A hedge fund manager summed it up as: 'Murkiness creates uncertainty and support to the price.' 
Puzzled? Here is how it works. The widespread expectation of a share sale resulted in  heavy short selling of Construction Bank.  Speculators were expecting a good chance to cover their short position at a deep discount to the market through the share sale. This would have started a vicious cycle on the share price - not something the bank management would want to see.
The beauty of using Hopu as the 'sole agent' is  no one  knows for sure what will be available in the market. In the case of hiring a professional investment bank as underwriter, the market will have an  idea of the supply because the underwriter is unlikely to sit on the shares and the risk.
That's not the case with Hopu running the show. This is not only because Hopu had earlier sat on  HK$5.5 billion worth of Bank of China shares sold by Royal Bank of Scotland Group, but also because it is the only one that knows for sure how much has been sold. The underwriters would only know details of their tranche. (In fact, no one  knows whether Hopu has sold  all the shares.)
The uncertainty of supply results in massive short covering, providing  good support for the bank's  price and therefore the unloading of stakes. That partly explained the sharp price rise on May 8 when the market was told a 'normal' share sale was not happening.
So Construction Bank  gets certainty. Hopu gets a handsome return - the high fee plus a chance to profit from the deep discount.
But how about the interests of the seller, Bank of America? Would a more experienced international broker have been able to secure a price higher than HK$4.20? Why did Bank of America accept Hopu?
Given the fact that some buyers have been able to flip the shares at HK$4.80 the day after the deal, these questions are legitimate. 
'Let's be fair. Despite the murkiness of the deal, genuine book buildings have been done on the part of the underwriters,' said an insider. 
Bank of America's initial target of HK$4.90 was rejected by the market.
Really,  did the bank have much choice? It needs money. It also needs to maintain a long-term relationship with Construction Bank or, to be precise, Beijing, which wants a systematic sell-down.
Enter Mr Fang, who has deep roots with both the bank and Beijing. He promises to buy the stake in one go. What else can you ask for? After all, there isn't too big a difference between a 122 per cent profit and a 150 per cent profit, right?




Delving into the murkiness of Construction Bank deal