US equity fund Newbridge Capital is set to become the first foreign investor to win control of a Chinese lender by lining up a deal to buy an 18 percent stake in Shenzhen Bank for $150 million.
The Asian bank specialist will soon acquire the stake from four existing stake holders, becoming the largest single shareholder, Shenzhen Development Bank Co Ltd said in a statement on Monday.
Newbridge - whose first attempt to buy control of the Shenzhen-based bank collapsed in a legal wrangle in 2003 - is one of many foreign investors keen for a foothold in a huge but shuttered industry that harbours $1.3 trillion of savings.
Analysts say foreign banks are willing to overlook ownership caps, costly capital requirements and limits on expansion so long as they can ride on the coat-tails of their partners' extensive branch networks and gain valuable local contacts.
"The Chinese banking sector may be opening up, but foreign banks still face a lot of restrictions on organic growth, so buying a stake in a local bank is a faster and easier way to expand," said analyst Xu Lan at China Southern Securities.
Newbridge's move comes on top of a separate plan to take 4.82 percent of Minsheng Bank, China's sole private lender, for about $110 million. The fund has also been eyeing assets in South Korea to add to a half stake in Korea First Bank bought in 1999.
Newbridge will pay $150 million for the stake in Shenzhen Bank, said a source involved in the negotiations, who asked to remain anonymous.
That would be substantially less than the stake's 3.34 billion yuan ($404 million) market valuation, a benchmark ignored for acquisitions in China because stock prices are generally regarded as overvalued.
It would also be below the $171 million valuation suggested by acquisitions by the likes of Citigroup Inc and HSBC Holdings Plc, which have valued lenders at about 1.5 times to two times book value per share.
Newbridge declined to comment. As the largest single shareholder, Newbridge would get a majority of board seats under Chinese law. Shenzhen Bank's board has 11 executive members and three independent, non-executive members.
"This is one institution where they can get effective control and run the company," said Sunil Garg, an analyst with Fox-Pitt, Kelton in Hong Kong. "Minsheng is not an institution where they would get effective control."
But he added: "Of the five listed banks, this is by far the weakest of the lot. If you look at the numbers of this company, you'll find that the capitalisation...is a pretty big issue." The plan's revival surprised many insiders, who had thought the relationship between Newbridge and Shenzhen Bank had soured after a series of embarrassing disputes.
Newbridge launched arbitration proceedings with the Paris-based International Chamber of Commerce in October, demanding compensation from Shenzhen Bank shareholders for derailing its first acquisition attempt.
It then withdrew that case, the Chinese bank said in April, without offering a clear reason why.
Industry insiders said the issue of control had been partly responsible for scuppering Newbridge's first acquisition attempt.
"The Shenzhen government made concessions, such as giving up control, to push the deal through because it was eager to overhaul the bank, but didn't have the financial resources," Xu said.
Analysts had thought Beijing would be loath to cede control of any state-owned bank.
Newbridge Capital will acquire 348.103 million shares, Shenzhen Bank said in the statement published in the official Securities Times newspaper - equivalent to a 17.89 stake.
"All parties have completed talks and plan to sign a formal agreement shortly," the bank said in its statement. "Our company board is in favour of attracting strategic investors in order to boost long-term development of the bank."
Investors cheered the deal, driving Shenzhen Bank shares up four percent to 9.62 yuan.
China is eager for foreign investors to inject global practices into a banking industry saddled with more than $200 billion in non-performing loans and notorious for corruption.
Up to 40 percent of loans are estimated to have gone sour, and Standard & Poor's estimates it would cost $656 billion to bail out the banking system, equivalent to 43 percent of the country's forecast 2004 gross domestic product.
In December, China injected $45 billion into state banks China Construction Bank and Bank of China to help them shore up capital and write off billions of dollars of bad debt, part of reforms that include share listings this year or next.
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