Wang Shi of China Vanke races against time to find way to block Baoneng’s hostile takeover

China Vanke chairman Wang Shi and his team are racing against time to look for a winning formula in a battle to retain control of mainland China’s biggest home builder as Baoneng Group and Anbang Insurance increasing their holdings in the developer to a level where they can seize control of the company.

So far, none of the alternatives Wang is looking at seems good enough.

In Vanke’s letter to media on Wednesday, the firm explained again the reasons of not welcoming companies of the Baoneng Group, pointing to the different culture of the two companies.

Vanke said in the letter that they had communicated with Baoneng , but “ we had no confidence to convince them not to change Vanke’s culture and operating style.”

‘We welcome them to buy Vanke shares, but we do not welcome them to control the company. We are still willing to have dialogue (with Baoneng). We still hope that Baoneng can seriously consider the risk of changing Vanke’s culture and operating style.

“We both are Shenzhen enterprises, we do not want to see a destructive outcome to both sides because of the fight,” the company said in the letter.

The move by Vanke to issue new shares to a friendly third party is widely seen by investors as one option. Some suggest suspending the trading of shares for a long period of time which is aimed at increasing the funding pressure of Baoneng as another option. This is because the funding of Baoneng’s stake in Vanke was done largely through margin financing.

On Friday , Vanke requested suspension of its shares in Hong Kong and Shenzhen pending a planned share issue for acquisitions. Two days later, Vanke said in a filing that it will disclose the restructuring plan before January 18, 2016.

The battle heated up when Vanke on December 4 announced that Baoneng, through Jushenghua and Foresea, held a combined 20 per cent stake, overtaking China Resources to become Vanke’s largest shareholder. As of December 11, the companies have raised their stake to 22.45 per cent.

In response to Baoneng’s moves, Wang of Vanke on Thursday said he was not welcoming Baoneng, questioning the company’s credibility and financing capacity.

Baoneng, controlled by Yao Zhenhua, is a privately-owned property developer and financial-services group based in Shenzhen. By December 15, it had raised its stake in Vanke to 23.52 per cent.

On the other hand, Anbang Insurance Group, which is said by mainland media to be an alliance partner of Baoneng, increased its holdings of China Vanke’s A shares to more than 7 per cent before trading in the stock was suspended on Friday afternoon.

Combined, the two companies own 30.52 per cent of shares in Vanke.

David Hong, the head of research at consultancy China Real Estate Information Corp’s Hong Kong office, said he believed Vanke management may invite a third-party investor as a way to dilute Baoneng’s control over the company to fend off its attempted takeover.

“It is impossible for them to issue shares to China Resources. China Resources does not have rights to vote so that the resolution will not be passed,” said Hong.

In a move to block an unsolicited takeover by Baoneng , mainland media reported that Wang and his team had arrived in Hong Kong over the weekend to meet fund managers to seek their support.

HSBC, Value Partners and Credit Suisse have also increased their shares in Vanke before its shares were suspended from trading. But those funds only account for a small percentage of shares so they cannot change the current situation, said an analyst, adding that the funds might want to turn a quick profit if the shares surge.

“Issuing new shares to dilute Baoneng’s shareholding is not an easy option,” said Hong Kong-based fund manager Lee Kwok-suen. It requires approvals from shareholders, he added.

Analysts said it is also not easy to find a new investor who can pay HK$30 billion to buy the new Vanke shares in a such a period of time, unless Wang can convince Beijing and get its support.

“The last option is to suspend the shares for a long period of time. As companies of Baoneng bought shares in Vanke through margin financing, the group will see increasing funding costs and banks will force them to repay their loans,” said Hong.