FINANCE: Minsheng’s $1 Bln HK Brokerage Buy Near Collapse?

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Bottom line: Minsheng Bank’s $1 billion deal to buy Quam could be on the brink of collapse, the victim of rapidly tumbling sentiment towards Chinese and Hong Kong brokerages amid China’s stock market sell-off.

Minsheng’s HK brokerage buy on brink of sinking?

What a difference a year makes. At this time last year stock brokers in China and nearby Hong Kong were a hot ticket, attracting billions of dollars as investors bet on their huge growth potential tied to booming stock markets in both places. But that enthusiasm has quickly evaporated as China’s stock markets undergo a massive correction, which may be a major factor behind the sputtering of a major acquisition in the space.

The deal I’m referring to is the previously announced purchase of Hong Kong brokerage Quam (HKEx: 952) by Minsheng Bank (HKEx: 1988; Shanghai: 601988), China’s oldest privately owned bank. Minsheng has just announced that a deadline for it to close the Quam investment, worth nearly $1 billion, has passed without closure, hinting the deal may be on the brink of collapse.

Minsheng announced the deal with fanfare nearly a year ago, when China’s stock markets were in the midst of a boom that ultimately saw them more than double in the space of just a half year from late 2014 through the middle of 2015. During that time, late last April to be precise, Minsheng announced it would purchase a controlling 90 percent stake in Hong Kong-based Quam for up to $970 million. (English article)

Now Minsheng has just announced that a February 28 deadline has passed without closure of the deal. (HKEx announcement) The announcement notes that passing of the deadline means Minsheng is no longer obliged to move forward with the deal, but also adds the 2 sides remain in discussions.

Not surprisingly, Quam’s shares tanked after the announcement came out, losing 37 percent of their value. At their current price of HK$0.82, they are still well above the price of HK$0.565 per share that Minsheng originally agreed to pay. That means there could be even more downside, since investors were probably hoping that Minsheng’s investment would give Quam better access to China’s stock markets.

Shrinking Profit Potential

Of course, China’s stock markets no longer hold the same profit potential for brokerages that they did at this time last year anyhow. That’s because most such brokers make their money from fees tied to transactions, which were soaring in number last year during the stock market boom.

But transaction volumes have dropped sharply since the sell-off in the second half of last year. Those volumes have plummeted further recently, as a renewed sell-off that has seen China’s stock markets tumble around 20 percent this year prompted Beijing to roll-out informal bans on selling of stock held by big state-owned investors. Against that backdrop, it’s not surprising to read that Minsheng may be getting cold feet about Quam, since Hong Kong’s stock markets often track what’s happening in nearby China.

A collapse of this particular deal would mark a sharp reversal for a sector that was red hot in the first half of last year. In just a few months during that time, names like Orient Securities (Shanghai: 600958), Citic Securities (HKEx: 6030; Shanghai: 600030) and Haitong Securities (HKEx: 6837; Shanghai: 600837) collectively raised billions of dollars in new money through IPOs and secondary offerings. (previous post)

Leading brokerage Citic Securities is a good bellwether for how drastically sentiment towards the group has changed. Since peaking last April, its shares have lost 57 percent of their value, and were down even more before a recent minor rally. Against that backdrop, it does seem highly likely that Minsheng could ultimately walk away from its previous commitment to buy the controlling stake in Quam, and we’re unlikely to see many more major brokerage-related investments for the rest of this year.

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