Citic Group Seeks USD36.5 Billion in Hong Kong Listing by Chris Cruse and Associates Real Estate Broker

The Citic Group, one of China’s biggest state-owned conglomerates, said on Wednesday that it had reached a formal deal for what amounts to a backdoor listing in Hong Kong valuing the company at about $36.5 billion.

The cash-and-stock deal, valuing the company at 227 billion renminbi, calls for Citic to sell nearly all of its operating assets to its Hong Kong-listed unit, Citic Pacific, which invests in steel, iron ore and real estate.

Citic Group was founded in 1979 at the start of China’s modern economic 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 is ranked No. 172 on the Fortune 500 list of the world’s biggest companies.

‘‘For the first time ever, Citic Pacific investors will have access to China’s largest, most prestigious and pioneering conglomerate,’’ Chang Zhenming, the chairman of both Citic and Citic Pacific, said on Wednesday in a news release. ‘‘Citic has always been right at the heart of the process of reform and development in China, and this landmark transaction marks the next stage of the group’s transformation.’’

Analysts have described the giant listing as a potential harbinger for a new era of overhauls to China’s huge but sometimes sclerotic state-owned corporations.

‘‘We believe that this transaction in the equity market may signal a new way for Hong Kong to catch the wave of China’s next round of state-owned enterprise reform,’’ Liu Li-Gang, the chief economist for greater China at the Australia and New Zealand Banking Group, wrote last month in a research note, when Citic’s negotiations were announced.

State-owned Chinese companies that are listed in Hong Kong had a combined market value of 9.7 trillion Hong Kong dollars, or $1.25 trillion, at the end of last year. But Mr. Liu calculates that is equal to only about 9 percent of the assets on the books of all Chinese state companies — implying many more state assets could be heading for public listings in Hong Kong. ‘‘This means that there is plenty of room for Hong Kong’s equity market to grow,’’ Mr. Liu wrote.

Under the terms of the deal announced on Wednesday, Citic Pacific, a much smaller subsidiary, will issue 177 billion renminbi worth of new shares to Citic at a price of 13.48 Hong Kong dollars apiece — a premium of 6.5 percent to where Citic Pacific’s stock closed the day before the negotiations were announced.

To maintain a minimum public float — ensuring that 25 percent of its shares are listed and not owned by the controlling shareholder — Citic Pacific will issue an additional 4.68 billion new shares to unnamed institutional investors, raising 63 billion Hong Kong dollars to fund the cash portion of its deal.

The 227 billion renminbi price for the deal is a minimum; it could be revised upward by an independent appraiser, whose yet-to-be announced valuation for the assets must be approved by China’s Ministry of Finance, Citic Pacific said in its announcement.

China requires that state assets not be sold for less than their book value. Because of this, Citic Pacific has had to price its deal for the parent company’s businesses at a level that in several cases has represented a premium to what the stock markets have signaled they are worth.

Nine companies that are part of the Citic family are already listed in Hong Kong. Four of those companies trade at a discount to their book value, including Citic Bank, which trades at 0.77 times its book value, and Citic Resources, which trades at 0.67 times book value.

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http://dealbook.nytimes.com/2014/04/16/citic-group-seeks-36-5-billion-in-hong-kong-listing

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