A rare attempt at a hostile takeover targetting China Vanke has ended with China Evergrande Group selling off a hard-bought 14 percent stake in the developer to a Shenzhen government company at a RMB 7.07 billion ($1.04 billion) loss, according to a statement on Friday to the Hong Kong stock exchange.
The announcement by Evergrande, which last year surpassed its long-term rival to become China’s largest developer by sales, is a vindication for Vanke chairman Wang Shi, but also underlines the dominant role of government firms and regulators in China’s ostensibly reforming markets as the nearly 18-month takeover battle appears to be drawing to a close.
In Evergrande’s statement, the Guangzhou-based developer revealed that it is selling its stake to Shenzhen Metro Group, the state-run operator of the mass transit system in the southern Chinese metropolis for RMB 29.2 billion. The sale will give Shenzhen Metro a 29 percent stake in Vanke and make it the developer’s single-largest shareholder after the local government firm had acquired a 15.3 percent stake in Vanke from China Resources Group in January.
Evergrande Takes a Haircut, Baoneng Could Face Worse
Shenzhen Metro’s ascension pushes aside the takeover attempt by Baoneng Group and its affiliate, Foresea Life Insurance. Baoneng and Foresea held a 25 percent stake in Wang Shi’s home building giant at the end of 2016, however, the Shenzhen-based conglomerate has been under pressure from regulators for financing its acquisition of that stake via sales of high-yield insurance products and warned recently that it might default on its debt obligations if regulator-imposed penalties were not lifted soon.
The sale is also a setback for Evergrande, after the developer run by billionaire Xu Jiayin had spent much of 2016 buying up its stake in Vanke and spent over RMB 30 billion on highly-leveraged share purchases before regulators stepped in to put an end to the buyout battle.
Following appeals by Vanke to regulators at the height of the takeover contest, in December Evergrande Life, which had financed much of the company’s share acquisition was banned from buying publicly traded shares by the China Insurance Regulatory Commission (CIRC). Foresea Life faces a similar ban and regulator forced Foresea’s chairman, Yao Zhenhua, to step down after exiling the Shenzhen entrepreneur from the industry.
Wang Shi Wins Big by Bringing in the Government
Evergrande’s share sale to Shenzhen Metro is a major win for Wang Shi, who had proposed the company as Vanke’s white knight in March last year, only to see the proposal pushed aside by Baoneng and its ally China Resources.
Now, with some help from government regulators, Wang Shi gets his deal with Shenzhen Metro, which also gives the developer access to key sites above the booming city’s mass transit stations.
The impact of the deal is riskier for Baoneng, which finds itself as a minority shareholder in a state-run company run by hostile management. In February, Vanke filed suit to invalidate Baoneng’s share purchases in the developer on the basis that the conglomerate had violated securities laws by secretly borrowing funds through shadow banking networks to finance its stake acquisition.
Evergrande had already opened the door for Shenzhen Metro to take effective control of Vanke in March when it gave the government firm proxy rights to its Vanke shares, and that same month Shenzhen declared Vanke to be a directly controlled entity of the municipal government.