China Vanke

Vanke stake sale smooths way for Evergrande’s much-prized Shenzhen IPO, despite US$1b hit

Market watchers believe Guangdong property giant has reached tacit agreement with Shenzhen government, meaning the city’s policymakers will support Evergrande’s debut on the local stock exchange

PUBLISHED : Tuesday, 13 June, 2017, 8:00am
UPDATED : Tuesday, 13 June, 2017, 8:00am

Despite taking a hefty loss of 7 billion yuan (US$1 billion), China Evergrande Group is still considered very “lucky” to have extracted itself from the China Vanke takeover saga, according to analysts.

Evergrande, China’s largest property developer, revealed its holding in housebuilder Vanke was sold to Shenzhen Metro Group for 29.2 billion yuan on Friday.

The sale of its 14.07 per cent stake to Shenzhen Metro, which Vanke said on Monday night had been approved by the Shenzhen authorities, makes the state-backed subway operator the largest shareholder in Vanke, and effectively draws the line under a fierce battle for control of the business.

Evergrande is at a “critical stage” in its planned back-door listing in Shenzhen, thus market watchers now believe the Guangdong property giant has reached tacit agreement with the Shenzhen government, meaning the city’s policymakers will support Evergrande’s debut on the local stock exchange, if it agreed to sell the Vanke stake to Shenzhen Metro.

“For Evergrande, listing on the A-share market is its most important task this year,” said Liu Feifan, a property analyst at Guotai Junan International, “so it’s (US$1 billion) a reasonable price to pay to be able to realise its goal.”

The State-owned Assets Supervision and Administration Commission of Shenzhen Municipal Government (Shenzhen SASAC) is behind Shenzhen Metro, while Evergrande needs SASAC’s approval to relocate all its property assets into one separate entity listed in Shenzhen via a reverse merger.

Here’s why Evergrande’s pursuit of Vanke failed: politics

The developer is targeting the completion of injecting those property assets into the mainland A-share shell company before August.

“Taking into account the government’s sharp criticism, clearing its shares in Vanke is the best ending for Evergrande, no matter how much it costs,” said David Hong, head of research at China Real Estate Information.

The Chinese securities and insurance regulators rebuked and punished both Baoneng Group and Evergrande on their attempted leveraged buyouts of Vanke using insurance funds in December, a strong signal that Beijing was on the side of Vanke’s management in what became a protracted and bitter battle of control of the company at the time.

“Evergrande has had to comply with the regulations,” said Jackson Hui, a property analyst with China Merchants Securities International, “and this peaceful settlement is also what Vanke’s shareholders wanted, as its management team will now stabilise.”

Vanke’s Shenzhen-listed shares surged 9 per cent on Monday by midday, narrowing to 4 per cent higher to close at 21.7 yuan.

The Vanke takeover attempt first came to light in late 2015, when the Chinese property-insurance conglomerate Baoneng accumulated a 25.4 per cent stake in the business to mount a hostile takeover and oust Vanke’s existing management.

As the battle hotted up, Evergrande muscled in on the corporate raid, quickly building a 14.07 per cent stake in its Shenzhen-based peer, becoming the third largest shareholder, behind Baoneng and state-owned conglomerate China Resources.

The five things you need to know about the battle of Vanke

With the clear support of the Shenzhen authorities, Vanke’s management then introduced Shenzhen Metro as a “white knight” investor to fight off the raiders.

China Resources transferred its entire 15.31 per cent holding in Vanke to Shenzhen Metro in January, which became the second largest shareholder.

Hui said the 29 billion yuan sell off of its shares will help Evergrande reduce about 2 billion yuan in interest costs, as the indebted developer plans to use most of the proceeds to repay borrowings.

But more importantly, Evergrande is likely to have created a lot of goodwill with the Shenzhen government going forward. One obvious clue is the developer officially moved its place of registration to Shenzhen, from Guangzhou on June 1.

For Baoneng, meanwhile, the whole affair hasn’t been so kind on its fortunes.

Its shares in Vanke now face a lock-up period until July, while it has also been barred from selling new universal life insurance policies since December, which contributes 80 per cent of its insurance income.

“The company is under serious capital pressure,” Guotai Junan’s Liu said. “It will have to sell off Vanke shares to pay back policy holders once the lock-up period expires.”