By Keith Fitz-Gerald
And William Patalon III
Money Morning
In a trendsetting deal that gives U.S. investors a direct play on mainland China’s fast-growing financial muscle, China Minsheng Banking Corp. Ltd. will acquire a 9.9% stake in San Francisco’s UCBH Holdings Inc. (UCBH), making this the first Chinese investment in a U.S. bank.
The deal calls for Minsheng to pay as much as $317 million over the next few years for the 9.9% stake in UCBH Holdings. The deal is subject to approval by regulatory agencies in both China and the United States.
In recent months, we’ve stated time and again that cash-rich China companies – most of them backed by the China government and its $1.33 trillion in foreign reserves – would begin prowling the U.S. market for assets on the back of a crippled dollar. We’ve specifically called out financial institutions and energy resources companies as among China’s highest priority targets.
We were right about the deals. But what makes this transaction truly remarkable is that the Beijing-based Minsheng isn’t state-owned, and never has been. Formed by a group of investors in 1996, it was China’s first private bank to list on the Shanghai Stock Exchange, the Financial Times reported.
The deal with UCBH looks like it couldn’t have been a better fit if it had been designed from scratch. The Nasdaq-listed UCBH Holdings owns United Commercial Bank, which specializes in serving U.S. firms doing business in China, Hong Kong and even Taiwan (unusual for a China-based company). It also serves the large-and-growing Chinese-American community here in the United States.
UCBH said back in March that it would pay $205 million to buy the Shanghai-based Business Development Bank Ltd., building up its presence in mainland China.
The Minsheng investment in UCBH is clearly a shrewd deal all the way around, a well-known marketing expert said late last night (Tuesday).
“What you are seeing here is the growth of globalization,” said Eugene Fram, the J. Warren McClure Marketing Research Professor at the Rochester Institute of Technology College of Business. “It also demonstrates the increasing affluence of China and of Chinese companies, which are now reaching out to extend their global position beyond their own country. This is an embryonic deal – embryonic in that it marks the birth, or beginning, of something very new.”
Other deals will undoubtedly follow, Professor Fram said.
This latest deal calls for Minsheng to make several investments in UCBH, ultimately bringing its ownership stake to 9.9% by the end of next year. In the first transaction, valued at roughly $97 million, UCBH will issue 5.4 million new shares – about 4.9% of its now-enlarged capital – to Minsheng at $17.79 per share, the Journal reported.
That currently represents a discount of about 10% to UCBH’s current share price. UCBH closed yesterday (Tuesday) at $19.76 a share, up 40 cents (2.07%) each.
In a company statement, UCBH said that “the share issuance will fully satisfy the equity-funding needs for UCBH’s pending acquisition in China, which was announced in March and which we anticipate closing in the fourth quarter.”
In the second transaction – which will take place next year – Minsheng will boost its stake in UCBH from 4.9% to 9.9%, either through another share placement or via a purchase of secondary shares, the FT reported.
In a little-reported addendum to the deal, Minsheng has the right to boost its stake in UCBH to 20% by June 30, 2009.
Currently, UCBH has roughly $10.6 billion in assets and a market value of $2.1 billion, while Minsheng has more than $110 billion in assets and a market value of approximately $30 billion. UCBH has 51 branches in California, with 19 more across the United States. And it has offices in this country and in China. As of June, Minsheng had 298 branches in key China cities along the country’s wealthy coastal areas.
China has been “pressing” U.S. officials to speed up the granting of licenses for Chinese banks to set up branch networks in the U.S. market, the FT said. Minsheng has reportedly received the advance blessing of U.S. regulators, the Journal reported.
But some other Chinese companies – such as telecommunications-equipment-maker Huawei – are facing much-increased scrutiny by this country’s federal government due to security concerns. Huawei, which has reported ties to China’s military, is trying to take a minority stake in 3Com Corp., as part of a takeover by a U.S.-based venture fund.
[To see the Money Morning report on this highly controversial deal, please click here, or see the link in the ‘related stories’ list at the end of this report.]
China banks are trying to expand worldwide. In August, Industrial & Commercial Bank of China Ltd., China’s No. 1 bank by assets, acquired a 79.93% stake in Seng Heng Bank Ltd., which is the third-largest lender in Macau. Last year, China Construction Bank Corp., paid $1.2 billion for Bank of America Corp.’s (BAC) 17 branches in Macau and Hong Kong.
But guess what? As our Money Morning research reports have repeatedly underscored, American investors can’t invest in either of these two promising China-based stalwarts.
But now you can invest in UCBH. And through that bank, you can profit from the growth in China’s financial services sector. And that growth will be substantial.
Nor will this be the last such deal. And you can be sure that when those deals are announced, we will bring you both the news and – even more importantly – the analysis.
Keith Fitz-Gerald is a Contributing Editor to Money Morning, and is its resident Asia expert, spending six months each year living with his family in Kyoto, Japan. Fitz-Gerald most recently gained widespread notice for breaking the so-called “Bin Laden Trade” story here in Money Morning. William Patalon III is Money Morning’s Managing Editor.
News and Related Story Links:
- The Wall Street Journal:
China Minsheng to Buy
UCBH Stake in Landmark Deal. - The Financial Times:
Chinese bank in landmark US investment. - Google Finance:
China Minsheng Banking Corp. Ltd. - Google Finance:
UCBH Holdings Inc. - Money Morning Investment Analysis:
Here’s Why MGM is a High-Profit Play on China. - Money Morning Investment Analysis:
How to Profit From the Dubai-China Connection. - Money Morning News Analysis:
Mattel Recalls Signal China’s Arrival. - Money Morning Investigative News Analysis:
The $900 Million ‘Mystery Trade.’ - Prof. Eugene Fram:
The J. Warren McClure Marketing Research Professor at the RIT COB. - Money Morning Investment Analysis:
How to Profit From the Dubai-China Connection. - The Rochester Institute of Technology:
The E. Philip Saunders College of Business. - Money Morning News Analysis:
U.S. Officials Question Whether 3Com Deal Gives Defense Secrets to China. - Money Morning Investment Report:
Why U.S. Investors are ‘Boxed Out’ of Big Global Profits. - Money Morning Investment Report:
Global Investing: Has Wall Street Rigged the Game?
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.