China Merchants Bank Clinches Wing Lung Deal

The Chinese lender's agreement to purchase a 53% controlling stake held by the Wu family caps a three-month battle and values Wing Lung at $4.7 billion

By Anette Jönsson

China Merchants Bank has triumphed in the three-month battle for Hong Kong-listed Wing Lung Bank and has agreed to buy the 53% controlling stake that is held by the Wu family at a price that puts the lender's equity valuation at about $4.7 billion. The deal will trigger a general offer for the rest of the bank.

CMB, which is widely regarded as China's most profitable commercial bank, will pay the equivalent of 3.1 times Wing Lung's book value at the end of March and 2.9 times its value at the end of 2007, according to sources. The deal was signed on Friday, but isn't expected to be announced until today, which means the level of information was still scarce over the weekend. The achieved valuation is above that of several other bank acquisitions in the region in recent years, but below the price Singapore lender DBS Bank paid for Dao Heng Bank in 2001. At 3.3 times book, the latter is the most expensive acquisition of a Hong Kong bank.

CMB beat larger mainland rival Industrial and Commercial Bank of China (ICBC) and Australia's ANZ Bank to the deal even though it wasn't among the three banks that were initially short-listed. That list also included Bank of Communications, which dropped out in mid-May amid rumours that Beijing had sent a message to the state-owned banks to cap their bid price to avoid the risk of pushing one another to overpay. ICBC and Bocom are both majority-owned by the Ministry of Finance. CMB has links to the government, but is considered a privately owned bank.

Advised by JPMorgan, CMB managed to be brought back into the process and in the end is believed to have won because it tabled the highest bid. However, one source says the buyer has also made it clear that it will keep all of Wing Lung's employees for the time being.

CMB has a lot to gain from getting a foothold in Hong Kong, as it is the only one among the five Hong Kong-listed Chinese banks not to have a presence in Hong Kong—or anywhere else outside of China for that matter. Buying an established business with a pre-existing branch network and customer base is both quicker and cheaper than building one from scratch and Wing Lung's 35 Hong Kong branches will give CMB a solid base from which to expand operations. The Shenzhen-based bank, which ranks as the sixth largest lender in the mainland in terms of assets, is particularly strong within retail banking. It is also in the process of building a private banking business, which it can now be expected to take across the border and target at Chinese nationals living abroad.

This explains why CMB was so keen to buy Wing Lung, which had about $12 billion of total assets at the end of March. But it is also important to note that there is a scarcity of banks available for acquisition in Hong Kong where the smallest banks are typically controlled by families who are unwilling to sell - a fact that would have further increased its resolve not to miss out. This is the first M&A activity in the sector since Malaysia's Public Bank agreed to buy Asia Commercial Bank in February 2006. Investors have been snapping up some of the other potential takeover candidates, including Wing Hang Bank, Chong Hing Bank and Dah Sing Bank, since Wing Lung announced in March that its owners were in talks with several potential buyers in the hope that a deal would spark a wave of other acquisitions in the sector. Analysts note that another deal is unlikely in the near-term though, particularly in the wake of the recent surge in share prices. Since the March announcement, Wing Hang Bank has gained 15.2%, Chong Hing Bank is up 36% and Dah Sing Bank has added 35%.

Wing Lung itself has been identified as a potential target for years, but has never actually been in play. The fact that it is now finally being sold is believed to be at least partly a result of the fact that there is a generational change going on and the younger generation is more keen to monetise the holdings. And for the first time, the two families that control the bank—who are related and both named Wu—were in agreement to dispose of the bank which was set up in 1933.