Sunac to Buy 4 Kaisa Projects for RMB 2.37B – Merger is Off

Sunac China is buying four Shanghai projects from defaulting real estate developer Kaisa Group for RMB 2.37 billion ($380 million) according to announcements posted today from the two companies.

Sunac will be acquiring 100 percent of two of the companies, while picking up a 51 percent stake in the remaining pair, as Kaisa struggles to raise funds and stave off default before a February 9th bond payment deadline.

While reports regarding an investment by Sunac have been circulating for more than a week, the agreement between the two developers falls well short of the merger that many Kaisa investors had hoped for, and which had been widely rumoured up until today’s asset acquisition announcement.

Sunac to Strengthen Shanghai Position

Under the terms of the agreement, Sunac will gain projects planned to yield more than 553,000 square metres of residential and commercial space in Shanghai, helping to provide it with the scale that it was denied when Greentown China backed out of a planned merger deal last year.

Construction of the four projects, which include residential sites in Qingpu, Jiading and Fengxian districts, as well as a commercial project in Pudong has not yet started.

Both Sunac and Kaisa acknowledge that the sale of the Shanghai assets will require approval from government regulators, as well as creditors and shareholders.

For Kaisa, this is the second time that it has announced the sale of one of the projects included in today’s announcement.

On 31 December, Kaisa had posted a notice on the Hong Kong stock exchange that it would be selling Shanghai Qingwan Zhaoye to China Vanke for RMB1.2 billion, including about RMB1.19 billion in shareholder loans and RMB11.7 million in equity transfer fees. However, that deal was later terminated, apparently after the Shenzhen authorities objected to the sale price as being too cheap.

In today’s announcement, Kaisa said that it would be selling 100 percent of the 210,290 square metre residential project to Sunac for RMB1.17 billion, although this transaction will also involve Sunac taking over responsibility for shareholder loans.

No White Knight Yet for Kaisa

The asset sale may have provided Kaisa with the cash necessary to pay off a $26 million interest payment that it failed to make on a $500 million bond due on January 8th. The developer is already technically in default on the bond, but has a grace period that expires on February 9th to meet the obligation or become the first Chinese developer to default on its overseas notes.

However, after missing the deadline on a loan due on December 31st, and not being able to meet a commitment under a trust debt last month, Kaisa’s troubles now go much deeper than just the $500 million bond.

The Shenzhen government has already frozen sales at four of Kaisa’s projects since December, and while no official statements have been made, many observers believe that the authorities want to force the Kwok family, which controls the Hong Kong-listed developer to divest of their shares.

With many of the companies assets already frozen by creditors, and no clear resolution yet of its political issues, Kaisa path to resuming its position as one of southern China’s leading developers remains obfuscated by a new form of Shenzhen smog.

Could Other Suitors Emerge for Kaisa?

Even if today’s asset sales are approved by the government and Kaisa’s creditors, there still could be more deals in the works for the Shenzhen developer.

On Friday, local news website Yicai.com reported that Shenzhen Overseas Chinese Town is likely to acquire some of Kaisa’s projects in Shenzhen. Shenzhen Overseas Chinese Town, which has strong ties to the local government, has also been mentioned as being in discussions to acquire the Kwok family’s stake in Kaisa, as has fellow Shenzhen company, China Vanke.