The Citic Group, one of China’s biggest state-owned conglomerates, announced on Wednesday that it was negotiating what might amount to a backdoor listing in Hong Kong in a deal worth tens of billions of dollars.
The conglomerate has signed a preliminary cash-and-stock agreement to sell substantially all of its operating assets to its Hong Kong-listed unit, Citic Pacific, which invests in steel, iron ore and real estate.
Citic, the much larger parent group, was founded in 1979 at the start of China’s modern reform era and has investments that include banking, trust companies, insurance, energy resources and manufacturing. It has been considering a listing in Hong Kong for several years, and boasts being ranked No. 172 on the Fortune 500 list of the world’s biggest companies.
Citic and Citic Pacific have signed a preliminary framework agreement that would see Citic Pacific purchase the parent’s assets for a price that is yet to be determined by an independent valuer. The sale price must be approved by China’s Ministry of Finance, Citic Pacific said in a stock exchange announcement.
Citic had net profit of 34 billion renminbi, or $5.5 billion, last year, according to the announcement. Citic Pacific’s stock currently trades at around eight times its profit for last year. If the same valuation multiple were applied to the parent company’s assets, the deal could exceed $40 billion.
Citic Pacific has run into troubles of its own in the years since the financial crisis. The company lost billions of dollars on bad trades in currency derivatives disclosed in 2008. Partly as a result of those losses, Larry Yung, the son of the Citic Group’s influential founder, Rong Yiren, stepped down as chairman of Citic Pacific.
It was unclear on Wednesday how Hong Kong regulators would treat the transaction, should final terms of a deal be agreed upon. Because Citic Pacific is acquiring a much larger parent company, it may be regarded as a backdoor listing and subject to the same strict disclosure requirements as an initial public offering.
At the same time, the deal would not represent a change of controlling shareholders in the Hong Kong listed company â€" Citic already controls a 57.5 percent stake in Citic Pacific.
For Citic Pacific, the proposed deal “would greatly increase the breadth and scale of our business, providing an enlarged asset and capital base from which to improve our competitiveness and capture growth opportunities in China,†Chang Zhenming, the chairman of both Citic and Citic Pacific, said on Wednesday in a statement.
“Hong Kong has been our home for nearly 30 years,†and the city “remains the ideal place for the next phase of our development,†Mr. Chang added.
