Vanke power play seen ending with stake sale to state-backed Shenzhen Metro

HONG KONG (Reuters) - State-owned Shenzhen Metro Group's purchase of the second-biggest holding in China Vanke 2202.HK000002.SZ is likely to pave the way for it to take control of the property giant and put an end to a year-long corporate power struggle.

A sign of China Vanke is seen in Hong Kong, China August 22, 2016. REUTERS/Bobby Yip/File Photo

Vanke, the nation’s biggest property developer by market value, has been in crisis since Baoneng Group, a financial conglomerate, built up a stake of 25 percent and sought to oust management.

The $5.4 billion sale of the 15.3 percent stake by China Resources Group brings in a strong ally, analysts said, even if it falls short of previous plan to make the subway operator its top shareholder via an asset swap. That had to be abandoned last month after Vanke could not get major shareholders on board.

The subway operator in one of China's hottest real estate markets is expected to buy more shares from other major shareholders including Baoneng and Vanke's main rival China Evergrande Group 3333.HK, which also quickly built up a 14 percent holding late last year to be its No. 3 shareholder.

“Shenzhen Metro and Vanke is a strong tie-up because Shenzhen Metro has resources in core property assets and land, while Vanke has the operational capability,” said ICBC International analyst Li Xing Wen.

Representatives for Shenzhen Metro or the Shenzhen government unit that manages state-owned enterprises could not be reached for comment.

Vanke, which began as a Shenzhen state-owned enterprise in the 1980s before listing in 1991, is one of the biggest players in the Shenzhen real estate market, which saw prices soar 30 percent last year.

Li added that while Shenzhen’s economy was very strong, it did not have many big enterprises or state-owned companies and taking control of Vanke would give it earnings from one of the world’s top 500 companies.

Vanke shares in Shenzhen climbed 7 percent on Friday while those in Hong Kong gained over 5 percent, giving it a market value of some $34 billion. The stock was suspended from trade on Thursday ahead of the announcement.


An end to the rare high-profile power struggle in China could help Vanke regain momentum after losing the title of the nation’s No. 1 property developer by sales to Evergrande last year.

It has said that its projects were facing the risk of cancellation, banks were reconsidering credit ratings and employees were being headhunted.

“We believe Shenzhen Metro will be happy to retain most of Vanke’s existing board members in March 2017 when the company re-elects the board of directors. The stabilisation of the management team should help retain high-quality employees,” said Credit Suisse analyst Alvin Wong in a research report.

Representatives for Baoneng, which spent some 45 billion yuan (5.36 billion pounds) on building up its holding, could not be reached for comment. It has said little about its ultimate intentions despite manoeuvring to overturn Vanke’s board.

Analysts believe, however, that it may lose its appetite to buy further due to recent proposed rules that would stop it from using its insurance unit to further fund more share purchases.

Baoneng’s shares in Vanke will come out of a lock-up period that prevents them from being sold on Jan. 17, according to a Citi report.

Evergrande, which has spent $5.3 billion on its stake despite a debt pile of some $57 billion, said in a statement it has no intention to acquire further shares in its rival at this point in time.

The company, which is seeking a backdoor listing in Shenzhen for most of its property assets, has never fully explained why it built up its holding, saying only that it was for investment purposes.

State-owned China Resources Group, which had originally opposed the Shenzhen Metro deal but said it was not working with Baoneng, said it had decided to sell the stake after looking at its own development strategy and industry portfolio allocation.

Additional reporting by Donny Kwok; Editing by Edwina Gibbs