As the first Chinese bank to list on the stock market, Shenzhen Development Bank Co., Ltd (000001.SZ, hereafter SDB), created a new record: a “zero consideration” offer announced on May 29th. The offer is strange, to say the least - especially considering that 70% of Chinese listed companies have completed a stock reform program.
Since Newbridge Capital LLC, SBD’s major shareholder is involved, plus the fact that circulating shares account for 72.43% of its total, the issue has been in the spotlight since the stock reform program began last year.
Over the last two weeks, pressure surrounding the offer has mounted. Not surprisingly, the added scrutiny has brought a number of contradictions into plain sight, suggesting, more than anything, that circulating shareholders will reject another buyout offer.
Turbulence
On June 9th, SDB announced a revised offer. The bank stated a special dividend would be offered to shareholders within one year if prices top RMB8.75 (US$1.1) per share. The upward trigger price was also lowered by RMB2 (US$0.25) for its original level of RMB10.75 (US$1.36). Meanwhile, if the share price declines within a year, the protective price after adjustment is RMB7.25 (US$0.92) per share, an increase of RMB2 (US$0.25) from the previous RMB5.25 (US$0.66). Other terms and conditions, like the maximum offer of RMB0.48 (US$0.06) for every 10 shares (including taxation), have remained unchanged.
“Almost all of our senior managers have been on business trips recently,” said Bai Yun on June 9th, a clerk with the SDB Media Relations Office. She continued, saying that many of the executives are traveling to communicate with local holders of circulating shares. But on June 12th, after the lender had announced a final offer and resumed all transactions, shareholders responded in turn by unanimously closing shares. The over 600,000 close-outs threw SDB’s plan into a tailspin, forcing the board to quickly regroup and formulate a new offer. Needless to say, the majority of shareholders weren’t satisfied with the revised offer.
In early June, SDB and Newbridge Capital were being widely criticized and questioned by most circulating shareholders. Some complained that SDB was stingy and rigorous, citing the 3.47-for-10 offered by Minsheng Bank and the 3-for-10 offered by Shanghai Pudong Development Bank. Over the next year, SDB’s stock price is very likely to fluctuate between RMB5.25 (US$0.66) and 10.75(US$1.36) - presently around RMB8 (US$1), which means the current holders of non-circulating shares will obtain the right to trade at almost “zero cost”.
“It is as unrealistic that the holders of circulating shares expect more considerations as I expect go to work every day by helicopter,” stated SDB Chairman Frank N. Newman to the press on May 29th. He also glibly stressed that the bank’s revised offer is nothing more than reasonable.
Newbridge, which possesses 17.89% of SDB shares, believes even a 2-for-10 cash offer would cause havoc, forcing holders of non-circulating shares to dump half of their stocks in the lender. Yet another reason supporting the Newman’s confidence is Newbridge, a US-based investment fund, has a trust agreement with its investors. It follows that US laws do not allow consignee to discretionarily dispose any of investor’s property.
But Liu Qing, a project manager with Haitong Securities, believes the issue deserves a little more thought. Haitong, one of the earliest large-scale comprehensive securities firms in China, provides SDB with a guarantee on its stock reform offer. Liu points out that Newbridge has contributed to the bank’s success since their partnership began in 2004. So runs the manager’s conclusion that the shareholders should seek a balanced perspective between their short and long-term interests.
Wen Guoqing, a chief analyst with Hexun.com, one of the biggest financial web portals in China, holds that Newbridge broke the rules of the game like a “stock market hooligan”. They got their shares under the old system, and aren’t willing to fulfill their obligations under a new system.
Based on Wen’s calculations, Newbridge should pay RMB3.6 billion (US$456 million) as consideration, while holders of another 7.03% of non-circulating shares should pay RMB1.4 billion (US$177 million). In total, non-circulating shareholders should pay RMB4 billion (US$500 million), given the lender’s current stock market value of RMB15 billion (US$1.9 billion). Added to his analysis is the sale value of the 1.4 billion circulating shares, which figures in at a consideration of RMB2.86 (US$0.36) for every 10 shares. Meanwhile, with a pre-reform share price of RMB8.78 (US$1.11), SDB’s cash offer should stand at an approximate value of 3.25 for 10.
