Citic Pacific Ltd. (267) plans to sell about $4 billion of shares to restore its public float after absorbing assets from state-owned parent Citic Group Corp., people with knowledge of the matter said.
Citic Pacific may approach sovereign wealth funds like China Investment Corp. and Temasek Holdings Pte about buying stock in the offering, said one of the people, who asked not to be identified discussing a private process. The company said yesterday it agreed to buy Citic Ltd., its parent’s main operating unit with about $36 billion of shareholder equity.
The deal comes as Chinese President Xi Jinping advocates the most sweeping changes since Deng Xiaoping’s liberalization in 1978, including loosening yuan trading and allowing more private investments in state businesses. At $36 billion, a deal would be the biggest asset injection into a Hong Kong-listed unit by China, data compiled by Bloomberg show.
“The deal is consistent with the theme of state-owned enterprise reform, as one of the reform’s purposes is to increase securitization of national assets,” analysts from Goldman Sachs Group Inc., including Janet Lu, wrote in a report today. “If successfully completed, it would turn Citic Pacific into the largest listed conglomerate in China with a broader range of businesses.”
Citic Pacific will pay for the assets purchase with cash and new stock, which will reduce a public float that currently stands at 36 percent, according to data compiled by Bloomberg. Hong Kong’s stock exchange requires companies to have at least 25 percent of their outstanding shares freely traded, though the limit can be reduced to 15 percent for firms with market capitalization of more than HK$10 billion ($1.3 billion).
Shares of Citic Pacific jumped as much as 31 percent, a record gain, after resuming trading today. They closed 13 percent higher at HK$14.30 in Hong Kong. The company referred to yesterday’s announcement when asked about the size of the share sale.
Citic Ltd. is the largest conglomerate in China with holdings in companies including Citic Securities Co., the nation’s biggest listed brokerage, and commercial lender China Citic Bank Corp. (998), according to a press release yesterday. It also has interests in businesses including mining machinery, real estate, and oil production. The company’s net income, excluding its interest in Citic Pacific, was 34 billion yuan ($5.5 billion) for the year ended Dec. 31.
The price of Citic Pacific’s dollar-denominated 8.625 percent perpetual bonds jumped 4.22 cents on the dollar to 104.61 as of 12:10 p.m. today, poised for a record increase, according to prices compiled by Bloomberg.
Citic Pacific expects to issue shares to pay for the assets at a price of HK$13.48 each, it said in the statement yesterday. Assuming Citic Ltd. is priced at between 0.6 and 1 times book value, Citic Pacific would have to issue HK$131 billion of equity to its parent and at least HK$7 billion in new stock to the public to maintain its listing, Bank of America Corp. analysts said in a report today.
The move serves as a boon to Hong Kong after China’s largest e-commerce company, Alibaba Group Holding Ltd., said it plans to conduct its initial public offering in the U.S. after abandoning plans to list in the city. As part of its deal, Citic plans to move its domicile to Hong Kong, two people with knowledge of the matter said yesterday before the statement.
“With its established legal framework, high governance standards, international connectivity and strong talent pool, Hong Kong remains the ideal place for the next phase of our development and we are deeply committed to this market,” Citic Pacific Chairman Chang Zhenming said in the statement.
Citic Group joins other state-owned enterprises in making more of its businesses available to outside investors. Sinopec, Asia’s biggest refiner, plans to sell as much as 30 percent of its oil retail unit.
Beijing-based Citic Group, China’s first state-owned investment corporation, was set up in 1979 as part of paramount leader Deng’s push to modernize and open up China’s state-controlled economy.
Since its inception, Citic Group has been the “pilot of national economic reform and an important window on China’s opening to the outside world,” it said on its website.
At $36 billion, the deal would top China Mobile Ltd.’s $32 billion purchase of seven wireless networks from its parent to be the largest such asset injection into a Hong Kong-listed unit by a Chinese company, data compiled by Bloomberg show.
Citic Pacific was bailed out by its parent after wrong-way currency bets led to a 2008 annual loss of HK$12.7 billion. The company owns the Sino Iron project in Western Australia, a $9.9 billion magnetite iron ore mine that made its first shipment in December after delays and cost overruns.
Citic Pacific said last month it faces pressure to write down the value of the project. It reported a 9 percent gain in 2013 profit to HK$7.6 billion, even as losses at the iron-ore unit doubled.
“Citic’s move is trying to save Citic Pacific itself, because Citic Pacific will enter a few years of great difficulty because of its Australian mining project,” said Francis Lun, chief executive officer of Geo Securities Ltd. “The trend is to operate on market principles, tapping the market for funds as China goes from a planned economy to an open economy.”
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