Sunac Merger Collapses as Song Weiping Returns to Greentown

The biggest merger of China’s largest real estate downturn has evaporated – apparently over entrepreneurial pride, as Sunac’s acquisition of a controlling stake in Greentown has been cancelled.

After rumours had circulated in recent weeks that Greentown China Chairman Song Weiping was backtracking on his agreement to sell his family’s controlling stake in the real estate developer, Sunac Holdings chairman acknowledged the end of the proposed merger on November 6th.

Now Song may be struggling to come up with RMB 2 billion in cash to buy back shares already sold to Sunac.

End of the Merger Announced on Weibo

In a post on his Weibo microblog, Sun Hongbin, chairman of Chinese developer Sunac Holdings noted,

Now that I am older, I like to create more win-win situations, less one wins and the other loses situations, and avoid lose-lose situations. If you can’t get something done, then do what you can to protect the interests of your employees, protect the interests of your shareholders, to ensure the peace and happiness of your family, and support your friends. No need to be a good person, no need to be a bad person, just be a human being.”

Sun’s announcement put an end to weeks of speculation that Song, whose business had been hit hard earlier this year by the downturn in sales of luxury real estate, particularly in Greentown’s home city of Hangzhou, was having second thoughts about the sale of his property company.

China’s Biggest Real Estate Merger Goes South

Sunac’s agreement in May to buy out up to 30 percent of the 43 percent stake in Greentown held by Song and his close associates would have been the biggest acquisition of a Chinese property developer in many years.

On May 22nd Sunac had agreed to buy more than 24 percent of Greentown’s shares for HK$6.298 billion, a more than 49 percent premium over the previous day’s closing price.

In the same announcement to the Hong Kong stock exchange, Sun Hongbin was proposed to become the co-chairman, along with Song. In the plan submitted to the exchange, Song would step down from his post and Sun would have become the sole chairman of Greentown by March 2015.

But Song decided not to sell.

Borrowing More Money to Buy Back His Company

From insider reports it has come out that the biggest reason that Song cancelled the deal is his own fear that the sales strategy being taken by Sunac’s team would ruin the value of the Greentown brand that Song had built.

Since the agreement between the two sides had no default clause, despite several rounds of negotiations, Song was insistent on keeping the company and cancelling the deal. According to sources familiar with the deal, Song is only being required to buy back the shares from Sunac for the original transaction price, plus a “reasonable premium.”

The biggest question going forward will be how Song, whose financial troubles this year were the impetus for the original share sale, will be able to come up with the cash to buy back the shares sold and pay Sunac’s premium. The deal is also likely to crimp the developers ability to finance and launch new projects in the future.

According to market reports Song is now trying to come up with RMB 2 billion in funding to finance his buy back, and has asked senior members of his Greentown team to chip in. The developer is also said to be in discussions with local investment firm China Orient Asset Management about funding.

Will Hangzhou Recovery Be Enough to Float Song and Greentown?

At the time that Song agreed to sell Greentown, he blamed his financial difficulties on “stupid officials” in an apparent reference to the home purchase restriction policies and tighter lending that had cooled down China’s once raging housing market.

Now those policies have been removed, and last month new home sales volumes in Hangzhou reached their highest levels in five years.

If Song is gaining new confidence based on this sales surge, however, it would be worthwhile to note that home prices still declined in Hangzhou during October, as they did in 73 out of 100 cities included in a private survey of the real estate market.

So for now Song’s deal with Sunac is over, but his negotiations with lenders may just be beginning.