The acquisition is to happen in two tranches over the next two years. The parties have also agreed to an optional third tranche which could see Minsheng increase its holding to 20% by 2009.
The first tranche of the deal involves Minsheng acquiring a stake representing 4.9% of UCB Holdings, the holding company of UCB, via an issuance of 5.4 million new shares at a price of $17.79 per share. The price is the 90-day average of UCBH's closing price on the bourse until September 28. The $96 million UCBH raises through the placement will be deployed to close its pending Business Development Bank acquisition in China.
UCBH traded up around 7% to $20 post the announcement of the deal on October 8, as investors bought into the rationale underlying the move. In the last 12 months, UCBH has traded as high as $20.19 and as low as $15.66.
"UCBH shares currently trade at 14.1 times 2008 earnings, representing less than a 5% premium to the average community bank, versus their historical 10%-15% premium," writes Joe Morford, RBC Capital Markets financial services analyst in an update about the UCBH stake sale. RBC has an outperform rating on the stock with a price target of $20.
Next year, in the second tranche of the deal, Minsheng will increase its ownership to 9.9% via a combination of secondary shares and/or primary shares. UCBH will decide the exact mechanism for the Minsheng investment at the time. Any issuance of new shares will be at a premium of up to 5% above the previous 90-day average closing price of UCBH shares.
Sources close to the deal say that in-principle regulatory approvals for the first two stages of investment by Minsheng have been obtained.
By June 30, 2009, subject to receipt of necessary regulatory approvals, Minsheng and UCBH may mutually agree that Minsheng will increase its stake to 20%. Pricing of any new shares issued will be at a premium of up to 15% above the previous 90-day average closing price of UCBH shares.
With a 20% holding, Minsheng could become the largest shareholder in UCBH in 2009.
UCB is a San Francisco-headquartered commercial bank, serving primarily the Chinese communities in the US and American companies doing business in Greater China. It had $10.6 billion in assets at the end of June 2007 with a branch network that includes 51 California branches/offices, eight in New York, a branch in Hong Kong, and representative offices in Shanghai, Shenzhen and Taipei.
The deal is pioneering for both parties. Minsheng will be the first mainland China bank to have a strategic-cum-financial stake in a US bank. UCBH will be the first US bank which is primarily focussed on the Chinese market to have a linkage with a banking institution in China.
Minsheng will have the right to appoint one director to the UCBH board upon the 4.9% acquisition. When its stake reaches 9.9%, UCBH will have the right to appoint one director to the Minsheng board. Sources close to the deal say the reciprocity reflects MinshengÆs respect for the platform UCBH has built and specifically for its chairman, Thomas Wu, who is widely expected to be the nominee on the Minsheng board.
Minsheng has agreed to a three-year standstill period. It will not have any management or operational control of UCBH. Details of any lock-in agreed by Minsheng were not disclosed.
China Minsheng started business in 1996 and currently offers the gamut of banking services in China. It trades on the Shanghai Stock Exchange with a market capitalisation of $30.1 billion. Minsheng had $111.9 billion in total assets as of June 30, 298 branches and 1,370 ATMs.
Merrill Lynch advised UCBH on the deal and Squire, Sanders & Dempsey acted as legal counsel. Shearman & Sterling was legal counsel to Minsheng.
This is the third strategic move announced by UCBH this year.
In March, UCBH announced it would spend $205 million to acquire 100% of privately-owned Business Development Bank (BDB) in China. BDB is Shanghai-headquartered and was established in 1992 as the first wholly foreign-owned bank in China. It has two branches and two representative offices and services primarily the fast-growing small- and medium-sized enterprise segment.
This followed a January announcement by UCBH that it would buy The Chinese American Bank (CAB) for $130.7 million in a combined stock and cash deal. New York-headquartered CAB had two branches in Manhattan Chinatown and one in Flushing, with $321.6 million of assets.
"We believe this deal lends additional credibility to UCBH's Greater China strategy and strengthens the proposition for customers to do business with the company. We also can envision several other potential synergies," comments RBC's Morford, with respect to the Minsheng investment.
For Minsheng, the strategic rationale for the investment is equally sound. The Chinese bank gets a foothold in a developed market and an opportunity to participate in a strong and synergistic segment in the US market through an established player. Minsheng shareholders welcomed the move and pushed the share price up 3%. Minsheng also led a rally in other China bank stocks.
Companies in Asia are flush with capital and seeking avenues to deploy this in a manner that improves their own business platform, suggesting there is an opportunity for a spate of similar deals across sectors and countries. What remains to be seen is how regulators in the target markets react to such moves.
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