China Merchants agrees Wing Lung buy: sources

HONG KONG (Reuters) - China Merchants Bank (3968.HK) has agreed to buy control of Hong Kong's Wing Lung Bank 0096.HK in a deal that values the small lender at $4.66 billion, people with direct knowledge of the matter said on Friday.

The deal, which some observers said was expensive, gives China's sixth-largest lender a presence in a city that has long been a gateway for overseas investment into China and is increasingly integrated with the mainland economy.

An agreement had been signed and would be announced on Monday, said one of the sources, who declined to be identified because of the sensitivity of the matter.

The tie-up is expected to trigger further bids for small Hong Kong banks, and deals a blow to the ambitions of Australia and New Zealand Banking Corp (ANZ.AX), which was also in the hunt.

"I certainly think it's overpaying," said ABN AMRO analyst Simon Ho in Hong Kong.

"Obviously there are more strategic reasons behind Chinese banks wanting to expand in Hong Kong as well, so I don't think it can be justified purely on the financial capability of Wing Lung."

China Merchants, based in neighboring Shenzhen, agreed to pay HK$156.50 a share, or 2.9 times Wing Lung's 2007 book value, for the 53 percent of the bank held by the controlling Wu family.

The share price is also a premium of about 6 percent over Wing Lung's last traded price. It closed at HK$147.40 on Thursday, giving it a market value of about $4.4 billion.

Wing Lung shares have soared nearly 80 percent since mid-March, when reports that its largest owners had hired investment banks to advise on a possible sale.

Shares in both lenders were suspended on Friday pending the announcement of potentially price sensitive news. Both had no immediate comment beyond their trading halt statements.

Large mainland rivals such as China Construction Bank (0939.HK) and Industrial and Commercial Bank of China (ICBC) (1398.HK) have also bought small Hong Kong banks in recent years.

"I think they would be keen to have a bigger presence in Hong Kong given that Hong and China are getting more integrated," said Ho.

Spokesmen for Credit Suisse (CSGN.VX) and UBS (UBSN.VX), which are advising Wing Lung's controlling shareholders, declined to comment. A spokeswoman for JPMorgan, which is representing China Merchants Bank (600036.SS), also declined to comment.

China Merchants will make a general buyout offer to Wing Lung's minority shareholders, one of the sources said, which it is required to do under Hong Kong rules.

TAKEOVER BAIT

Like numerous other small Hong Kong lenders that are the subject of frequent takeover speculation, Wing Lung operates in the shadow of heavyweights HSBC Holdings (0005.HK)(HSBA.L), BOC Hong Kong (2388.HK), Hang Seng Bank (0011.HK) and Standard Chartered (STAN.L)(2888.HK).

Wing Lung has assets of about $12.3 billion and operates 42 offices with a staff of more than 1,600.

Other Hong Kong lenders seen by observers as takeover bait include Chong Hing Bank (1111.HK), Wing Hang Bank (0302.HK), and Dah Sing Financial (0440.HK). Chong Hing and Dah Sing trade at about 1.5 times 2007 book, while Wing Hang trades at 3.26 times.

By comparison, in February 2006, Malaysia's Public Bank (PUBM.KL) acquired the small Asia Commercial Bank of Hong Kong for $591 million, or 2.5 times book value.

On Thursday, ANZ CEO Michael Smith told reporters that his bank was still in the running for Wing Lung, but on Friday put a brave face on defeat. ANZ, Australia's third-largest lender, has made clear its ambitions to grow its presence in Asia.

"Our strategy in Asia is long term, and there will be other opportunities," Smith said through a spokeswoman.

"Our main focus in Asia is organic, but acquisitions will play a role," he said, adding: "We will, however, only do deals where they make commercial sense.

ICBC (601398.SS), the world's biggest bank by market value, had also been in the hunt for Wing Lung, but recent media reports said China Merchants was in exclusive talks with Wing Lung.

(Writing and additional reporting by Tony Munroe; Additional reporting by George Chen in Shanghai and Victoria Thieberger in Melbourne; Editing by Anne Marie Roantree & Kim Coghill)