Citic Pacific to take over assets of parent
Deal will see the Hong Kong listed arm acquire diverse range of businesses for 225 billion yuan as part of the mainland's enterprise reforms
Eric Ng and Ray Chan
Steel-to-property conglomerate Citic Pacific has signed a preliminary agreement to buy essentially all of its parent company's assets not already under its control for about 225 billion yuan (HK$281 billion).
The deal marks a breakthrough for Beijing's drive to deepen the reform of state enterprises by subjecting all of their operations to international capital market governance standards.
In a statement to the Hong Kong stock exchange, Citic Pacific said it was in talks with ultimate shareholders Citic Group and Beijing Citic Enterprise Management to buy their entire holdings in Citic Ltd, which owns almost all of the group's assets not already under Citic Pacific.
They include financial businesses covering banking, securities broking, trusts, insurance, fund management, private equity investment and leasing.
Non-financial operations encompass property development, infrastructure, construction engineering, resources and energy, manufacturing, telecommunications and television broadcasting.
The assets' total book value was 225 billion yuan at the end of last year and their combined unaudited net profit was 34 billion yuan, Citic Pacific said.
"If the potential acquisition is completed, Citic Pacific will be a stronger company through a much enlarged shareholders' equity, broader range of businesses and deeper managerial skills," Citic Pacific said in the statement.
"These will enhance its competitiveness and ability to capture the economic growth opportunities [on the mainland]."
A spokeswoman said it was part of state enterprise reform and Citic Ltd, the nation's largest conglomerate, would set a precedent by having essentially all its operations listed on a stock market outside the mainland.
"The reason for choosing Hong Kong as the listing destination is because of its international legal system and corporate governance structure, which will play a key role in the reform," she said.
Citic Pacific said the acquisition price was under negotiation but must not be less than the value of the assets at the end of last year as assessed by a yet-to-be named independent valuer. It must also be approved by the Ministry of Finance.
The assets will be paid for in cash and new shares to be issued by Citic Pacific at HK$13.48 each, a premium of 6.48 per cent to their last traded price of HK$12.66.
Trading in Citic Pacific shares had been suspended since Monday.
Citic Pacific had HK$35 billion cash at the end of last year.
No execution timetable is available, but a person familiar with the situation said a shareholders' circular with more details was expected to be made available by the middle of next month.
As Citic Ltd owns 57.5 per cent of Citic Pacific, and Hong Kong-listed firms are normally required to maintain a public float of 25 per cent, analysts said a large number of the new shares were likely to be sold to outside investors after the asset injection to comply with the requirement.
"Since the assets to be injected are from a wide variety of industries, which makes it more difficult for investors to monitor their performance, the market will have to give a conglomerate discount to the new shares to be sold," an analyst who covers Citic Pacific said.
Citic Group, formerly known as China International Trust and Investment Corp, was the mainland's first overseas investment vehicle. It was set up in 1979 by former vice-president Rong Yiren, with special support from the late paramount leader Deng Xiaoping to help Communist China invest abroad in its early days of economic reform.
It was ranked 172nd by US magazine Forbes among the world's largest 500 firms last year.
Citic Pacific was listed in Hong Kong in 1990 through the reverse takeover of Hong Kong-listed Tylfull.
As a "window company" of the central government, Citic Pacific played a pioneering role in the mainland's economic reform and opening to the outside world, through tapping overseas capital markets.
While this has subjected its management to the scrutiny of international investors and corporate governance standards, its governance track record has been chequered.
Former chairman Larry Yung Chi-kin, Rong's son, resigned in April 2009, six months after the company belatedly revealed that unauthorised wrong-way bets on foreign currencies had led to the company suffering losses of about HK$15 billion.
Ben Kwong Man-bun, the chief operating officer of broker KGI Asia, said the parent company's willingness to accept Citic Pacific shares at a premium sent a positive signal to investors, since the stock had largely underperformed the market after the foreign-exchange loss and multiyear delays, major cost overruns and losses at its iron ore mining project in Australia.
"Investors should be reminded that it is still unclear what assets will be purchased at this juncture, but a price premium offered by Citic Group may give a lift to sentiment on Citic Pacific's fundamentals," Kwong said.