Endgame Nears for Vanke-Baoneng Showdown

Chinese regulators circle as investor vote could define Vanke's fate
By Fan Yu
Fan Yu
Fan Yu
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
July 24, 2016 Updated: July 29, 2016

China Vanke Co. Ltd., the world’s biggest residential real estate developer, has doubled down on efforts to blunt its top shareholder in an ongoing fight for control of the company.

The company—one of China’s most well-known firms—has been mired in an eight-month long dispute with No. 1 shareholder Baoneng Group, after the little-known insurance company began to amass Vanke shares late last year. Baoneng’s goal is to wrest control of Vanke from Wang Shi, the company’s founder and chairman.

Vanke’s latest gambit was a proposed asset purchase in Shenzhen via new stock issuance that would dilute current shareholders in an effort to stave off Baoneng’s increasing influence. Vanke’s future could come down to an investor vote on the plan.

The shareholder battle has intrigued market participants due to an almost shocking level of confrontation in a country where private ownership of companies is still maturing and negotiations are done in an orderly manner and behind closed doors. Wang called Baoneng a “barbarian,” a reference to the 1988 hostile takeover of RJR Nabisco by Kohlberg Kravis Roberts & Co. In turn, Baoneng accused Wang of not putting shareholders first and sought his ouster from Vanke’s board.

A Shenzhen Gambit

Vanke’s latest maneuver is a purchase of assets from state-owned Shenzhen Metro Group for 45.6 billion yuan ($6.9 billion) through new stock issuance. Vanke’s stock sale would dilute Baoneng and other investors’ ownership stakes. If approved, Shenzhen’s subway operator would assume the title of single largest shareholder, surpassing Baoneng’s stake.

In a statement last week, Vanke said that if the deal is consummated, Shenzhen Metro would hold 20.65 percent of its shares, exceeding Baoneng’s 19.27 percent after dilution. Before the sale, Baoneng through several subsidiaries and affiliates, had accumulated close to 25 percent of Vanke’s outstanding shares.

Vanke’s stock sale would dilute Baoneng and other investors’ ownership stakes.

The deal, and more importantly investor dilution, is critical for Vanke in its fight with Baoneng. “For our firm, the deal is not like icing on a cake, it’s a crucial matter to our future,” Vanke Senior Vice President Tan Huajie told investors in a transcript acquired by Bloomberg.

But approval of the deal is far from a guarantee. Vanke’s second biggest shareholder and long-time ally is state-owned China Resources Group, which owns a 15 percent stake in Vanke before dilution.

While initially wary of Baoneng’s share purchase, China Resources has since sided with Baoneng in criticizing Vanke’s recent maneuvers. China Resources also plans to vote against Vanke’s proposal to purchase the Shenzhen Metro assets, viewing it as a ploy to hurt current shareholders. China Resources Chairman Fu Yuning called the move “unfortunate” as the plan was never brought up to be discussed with the board.

Combined, Baoneng and China Resources own around 40 percent of Vanke’s shares prior to dilution and represent a formidable challenge for Vanke’s plans.

Ironically, more than 15 years ago it was China Resources that came to Vanke’s rescue as it fought off a similar shareholder takeover situation.

Baoneng Under Pressure

Baoneng also faces its share of challenges.

Wang criticized Baoneng and its affiliates for excess use of leverage. Vanke sent a letter to regulators earlier this year alleging that Baoneng used structured debt vehicles and sold high-yield wealth management products to accumulate its stake in Vanke.

The use of leverage could have negative impact on Baoneng’s financial health. Since Vanke shares resumed trading on July 4—it had been suspended on the Shenzhen Stock Exchange since Dec. 18, 2015—its value has fallen more than 20 percent to 17.39 yuan ($2.60).

If Vanke shares continue to fall, Baoneng could face margin calls on its position and may be forced to liquidate some of its holdings to pay back debt.

Baoneng could also draw increasing scrutiny from insurance regulators. At an industry conference last Thursday, China Insurance Regulatory Commission Chairman Xiang Junbo stressed that policyholder and investor protection are top-of-mind for the regulator, warning insurers to refrain from selling wealth management products to finance risky asset purchases.

A Test for ‘Capitalism’

To Western observers, the Vanke-Baoneng takeover battle seems routine. Activist investors such as Carl Icahn and Daniel Loeb shaking up corporate boards is commonplace in the United States.

Stakes are high for the Chinese Communist party in the Vanke fight.

But the showdown over Vanke is a rarity in the Chinese markets, where the ruling Communist Party craves stability and control above all. But in recent years, regulators have stepped up rhetoric about letting free market forces play a more decisive role in shaping the country’s financial markets.

Stakes are high for the Chinese Communist party in the Vanke fight. For one, this showdown will test resolve of the Communist party to stand pat and let market forces resolve the situation, one way or another.

Secondly, Wang Shi is a celebrity with a rock star-like reputation, and one of China’s first-generation entrepreneurs who is synonymous with the rise of Shenzhen as a business hub. He founded Vanke in 1984 as a private trading company under a government agency. Four years later, Vanke became one of the first companies in Communist China history to restructure into a private holding corporation.

After the Tiananmen Square crackdown of June 4, 1989, Wang helped several democracy activists escape to Hong Kong. He was detained for almost a year for assisting in the activism, a person familiar with his background told the Wall Street Journal in a 2014 interview.

In the following decades, Wang carefully managed his relationship with local and regional Communist party organs. Vanke largely followed party blueprints to develop and build homes and apartments across China during the real estate boom.

To avoid suspicion from the Community Party as he and the company rose to prominence, Wang held less than 0.1 percent of Vanke’s shares. Instead, the company has relied on state-owned organizations as top shareholders—such as China Resources—to support Wang’s position. But this strategy also left Vanke vulnerable to outside takeover.

While Beijing has kept a watchful and wary eye towards the saga playing out in Shenzhen—where both Baoneng and Vanke call home—it had not intervened directly.

Until now.

China’s top securities regulator, the China Securities Regulatory Commission (CSRC), gave indications of intervention last week after staying on the sidelines for more than half a year. The CSRC criticized both Vanke management and shareholders, and warned that any illegal actions would be punished although it did not cite what would constitute illegal actions.

“Vanke and shareholders not introduced any concrete plans to resolve their differences,” a posting on CSRC’s Weibo account read last week. “Instead their conflict has intensified, not regarding capital market stability, the interests of the company, nor those of small investors.”

The CSRC set up a task force to investigate the Vanke saga, according to Chinese business journal Caixin citing unnamed sources close to the situation. A separate notice released by China’s securities regulator says Vanke and its top shareholder both violated disclosure requirements on major shareholder changes.

Regulators’ scrutiny around the transaction and a pending shareholder vote likely means that for better or for worse, the Vanke shareholder battle could be nearing its endgame.

Fan Yu
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.