Baoneng Backs off from Fight over Vanke’s Control

(Beijing) – Privately-owned Chinese conglomerate Baoneng has indicated it would not seek for control of Vanke, essentially dropping its hostile bid for one of China’s largest property developers after its attempts sparked wide controversy and prompted state regulators to intervene.

“Baoneng is optimistic about Vanke’s prospects. As a financial investor, we will support Vanke’s healthy and stable development,” the company, owned by mysterious tycoon Yao Zhenhua, said in a statement on its website late Friday. It is Vanke’s largest shareholder with a 25.4% stake.

A financial investor normally has little interest in the company’s management and aims primarily for financial gains, while a strategic investor often looks to influence the company’s operation to increase the value of his investment.

“Yao Zhenhua has said he will not (seek to) be Vanke’s controlling stakeholder,” a source with knowledge about the matter told Caixin.

Two other sources close to Baoneng also said the company will continue to hold its Vanke stake on a principle of “protecting the economic interests and not harming” the company.

Baoneng’s announcement came after Chinese financial regulators from December suspended a product issuance by an insurance arm of Baoneng, through which it had raised most of the funds to buy Vanke shares, and sent officials to the insurers' offices to investigate into its management and financial situation.

It also followed claims by two other major Vanke shareholders – state-owned China Resources and rival real estate developer Evergrande – that they were willing to sell their holdings to the company’s white-night suitor Shenzhen Metro, the subway authority in Vanke’s home city that neighbors Hong Kong.

China Resources and Evergrande hold 15.3% and 14.1% of Vanke’s shares respectively. That means both sales could give nearly 30% of Vanke to Shenzhen Metro, enabling it to replace Baoneng as the company’s top shareholder.

Baoneng quietly began boosting its Vanke stake more than a year ago by buying shares in the open market in a hostile bidding that culminated in an attempt to eject the firm’s senior management team last year.

Vanke resisted by reaching an agreement with Shenzhen Metro who initially offered to sell the company valuable subway-adjacent land in exchange for 21% of the firm’s shares. But the deal was opposed by Baoneng and China Resources, who was Vanke’s biggest shareholder before Baoneng’s stake increase, causing the plan to sour after failing to meet a deadline.

Evergrande started buying Vanke shares in the open market last year, though it never formally explained its rationale for the move.

The drama triggered widespread controversy in the country with questions mounting over the shady way in which Baoneng amassed tens of billions of yuan in a short period of time for the bidding, leading to investigations by China’s financial regulators that found Baoneng and Evergrande used proceeds from short-term, high-yield wealth management-style insurance policies to buy Vanke shares.

National insurance watchdog the China Insurance Regulatory Commission (CIRC) has criticized the practices as “risky,” while the securities regulator, the China Securities Regulatory Commission (CSRC), openly blasted the hostile share buying as “barbaric.”

Sources told Caixin that the State-Owned Assets Supervision and Administration Commission (SASAC), the body that regulates big state-owned companies, was also critical of the role of China Resources.

Separately, Evergrande had been approached by the Shenzhen government to withdraw from the bidding for Vanke. In return, Evergrande, which is already a Hong Kong-listed company, would be allowed to make a second listing on the Shenzhen stock exchange using an existing shell company, a process often called a “backdoor listing.”

China Resources signed a deal on Thursday to sell all its shares in Vanke to Shenzhen Metro for 37.2 billion yuan ($5.4 billion).

On the same day, knowledgeable sources told Caixin that Evergrande wanted to sell its shares to the Shenzhen subway operator. Evergrande also said it had no intention of increasing its Vanke stake, and that it wanted to comply with the Shenzhen government’s wishes, according to a report submitted to the city on Dec. 17.

Contact reporter Fran Wang (fangwang@caixin.com)