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source from：WSJ
MARKETS HEARD ON THE STREET
Losers Abound in 7 Billion dollars Chinese Takeover Scuffle
By JACKY WONG
Updated June 20, 2016 6:08 a.m. ET
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Chinese takeover battles are rare, so the defensive playbook companies can turn to isn’t well developed. For one of China’s leading corporations, that has left nothing but a mess for investors.
China Vanke, the country’s second largest property developer by sales, announced over the weekend a long-awaited restructuring plan engineered to block its largest shareholder from getting a controlling grip. Vanke will buy 6.9 billion dollars worth of property projects from Shenzhen Metro, a subway operator in southern China’s boomtown adjacent to Hong Kong. Vanke will pay for the deal by issuing a big chunk of new shares.
The properties are beside the point. What is driving the share issuance is that it will dilute Baoneng Group, a separate property developer and financial services firm that became Vanke’s biggest shareholder last year after aggressively buying Vanke shares in the open market.
The deal would give Shenzhen Metro a 20.65% stake, making it Vanke’s largest shareholder instead. But that has upset China Resources, which until last summer was Vanke’s biggest shareholder for more than a decade. China Resources’ three Vanke directors voted against the transaction.
The projects Vanke would acquire from Shenzhen Metro won’t generate revenue for two to three years, so the new share issuance means an instant 20% earnings dilution. China Resources wants Vanke to finance the transaction with debt, given Vanke’s low gearing. But business success isn’t the motivation here. If it used debt instead of shares, Baoneng would remain Vanke’s top shareholder.
It isn’t clear Vanke can muscle the deal through. Two-thirds shareholder approval is required separately from both its Shenzhen shareholders and Hong Kong shareholders. If Baoneng and China Resources both vote against, their combined 40% stake would guarantee the transaction fails.
Baoneng has ample reason to oppose. The new shares will be issued at a 35% discount to Vanke’s mainland shares, lower than some of Baoneng’s purchases, which could wipe out a big part of its paper profits. Citi estimates Baoneng’s average cost at 15 yuan to 16 yuan a share, around the price of the new share issuance.
Baoneng’s Vanke purchases were financed by heavy borrowing and it may accept if it can exit its positions at profit. China Resources, eager to maintain its influence over the developer, could pick up shares from Baoneng. Of course, the parties have had since December to accomplish such a meeting of the minds and haven’t.
Vanke’s Shenzhen-listed shares may finally resume trading in early July. The company halted trading six months ago, a move whose sole purpose seemed to be to block Baoneng from amassing more shares. Meanwhile, Vanke’s Hong Kong shares continue to trade and have gotten reamed by the corporate drama. It is hard to find the winners in this corporate fight.
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