M&A: HSBC dumps Ping An, Sinopec in Nigeria

PUBLISHED : Tuesday, 20 November, 2012, 2:28pm
UPDATED : Tuesday, 20 November, 2012, 3:27pm


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Two new mega-deals on the M&A front are highlighting the fact that foreign companies are shedding assets as they look to improve their performance during the global downturn, providing both risks and opportunities for major Chinese firms.

On the risk side of the equation, Ping An Insurance (2318.HK; Shanghai: 601318) is learning the hard way that having a big foreign investor has both its advantages and disadvantages, as global banking giant HSBC (0005.HK; London: HSBA) prepares to dump its US$9.5 billion stake in the company. On the positive side, Sinopec could be getting a good deal with its new US$2.5 billion purchase of Nigerian oil assets from Total (Paris: TOTF) as the French oil giant looks to raise cash to boost its exploration operations.

Let's look at Ping An first, as this development comes as a fresh round of bad news for a former high flyer that has fallen on difficult times over the last year due to its aggressive expansion and investment strategies that have taken a toll on its earnings. HSBC has announced it is in talks to sell its 15.6 per cent stake in Ping An, and that several buyers have expressed an interest in buying.

Despite the assurance that others were interested in buying the stake and that the sale was part of HSBC's broader strategy to shed non-core assets, Ping An's Hong Kong-listed shares dipped nearly 2 per cent on Monday after the news came out and were down another 1 per cent in early Tuesday trade.

HSBC's dumping of the stake mirrors a similar trend that has seen other big names like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) also sell off big stakes in major Chinese lenders ICBC (1398.HK; Shanghai: 601398) and China Construction Bank (0939.HK; Shanghai: 601939) over the last year. The big foreign banks have dumped the stakes partly to improve their balance sheets, but also partly due to disappointment that strategic tie-ups they were hoping to get from the partnerships largely failed to materialize.

I suspect that both factors were a reason for HSBC's decision to sell its Ping An stake, and instead focus its China efforts on a more promising partnership with the smaller but more cooperative Shanghai-based Bank of Communications (3328.HK; Shanghai: 601328). This kind of divorce seems to indicate that big western financial institutions will be more selective in their China investments in the future, and will only focus on partners that really want to work together in true partnerships.

Meantime, let's take a look at the Sinopec news, which has seen the oil refining major agree to purchase a 20 per cent stake in an oil field off the Nigerian coast held by Total for US$2.5 billion. The sale marks a continuation of Sinopec's strategy of buying more oil-producing assets to better protect it from big swings in oil prices, since the company has historically been largely a maker of refined oil products and has to buy a big portion of its crude on the open market.

The sale also reflects Chinese resource companies' relatively big appetite for risk, since Nigeria has become notorious for attacks on foreign oil operations and their workers. Many of China's resources companies have shown relatively less concerns about such risky markets, and are active developers in unstable areas like Sudan and Congo, as well as the South China Sea where China is engaged in territorial disputes with some of its neighbours. Look for more of these sales by cash-hungry foreign resource companies in the year ahead, especially in these kinds of unstable markets where local risks often outweigh the benefits of resource development.

Bottom line: HSBC's Ping An stake sale reflects a more cautious investment attitude by foreign banks in China, while Sinopec's Nigeria purchase reflects a more aggressive posture in global resource M&A.