Shares in Citic Securities dropped yesterday following news that the mainland investment bank will purchase a minority stake in Hong Kong-headquartered brokerage CLSA.
In Hong Kong the stock fell 7.3 per cent to HK$13.48, while the Shanghai share price fell 4.1 per cent to 12.30 yuan.
On Friday, it was announced that Citic Securities had completed the purchase of a 19.9 per cent stake in CLSA for US$310.32 million in cash from Credit Agricole Corporate and Investment Bank, a subsidiary of Credit Agricole Group, one of the largest French financial institutions.
Under Friday's agreement, Citic Securities has an option to buy the remaining 80.1 per cent stake in CLSA from Credit Agricole for US$941.68 million in cash. The option expires on March 31 next year.
In a joint press release, CLSA and Credit Agricole said they intend to work towards the completion of the deal to sell 80.1 per cent of CLSA to Citic Securities by June 30. If the deal goes through, Citic Securities would purchase the whole of CLSA for US$1.252 billion.
'It's an all-cash deal. The market doesn't like it,' Macquarie analyst Rachel Li said.
'An all-cash purchase does not keep the interests of Citic Securities' and CLSA's shareholders aligned, since CLSA shareholders have no financial interest in the success of the combined entity,' a Macquarie report by Li and Victor Wang said. 'We see limited synergies in the combined businesses in the near future.'
An analyst who did not want to be identified said: 'Citic Securities paid too much. There is execution risk. The international equities business is under pressure at the moment. Markets are currently weak. The announcement came on a bad day for the international and Asia markets.'
A report by Keefe, Bruyette & Woods said Citic Securities is paying 2.2 times the likely book value of CLSA, which is on the steep side. The Macquarie report said Citic Securities is paying a high price for CLSA, at 21 times its price-earnings ratio for 2010. It booked a loss last year.
Net loss, in US dollars, reported by CLSA last year, after the firm made a net profit of US$61 million in 2010