Mirabile Dictu: Bear Makes a Deal With Citic

Well, I thought no one would do a deal with Bear, at least not a strategic investor sort (taking a trading position is another matter entirely). But the government controlled Chinese entity Citic appears to have done just that.

Hopefully I will have more thoughtful commentary later (I am pressed for time now), but I wonder if this is a rerun of Japanese taking minority stakes in US investment banks. The first deal, Sumitomo Bank’s investment in Goldman, did spectacularly well, but the later deals (Nippon Life-Shearson Lehman; Yasuda Life-Paine Webber) were duds, although those were cash purchases, while this is a cross investment. And in no deal were any meaningful synergies realized. Unless you believe the prospects for either Wall Street or the dollar are strong, this doesn’t look like a great bet.

From the Financial Times:

Bear Stearns and Citic Securities struck a landmark deal on Monday to invest $1bn in each other as part of a strategic alliance that will also set up an Asian investment banking joint venture between China’s largest listed brokerage and the US firm.

The cross-investment is one of the largest of its kind to involve a US and Chinese financial institution and is expected to be closely scrutinised by regulators and politicians on both sides. The largest shareholder in Citic Securities is Citic Group, a state-owned conglomerate.

The deal will extend Bear’s limited reach in Asia, but some analysts were disappointed because they had hoped for a more substantial capital infusion after the investment bank suffered a 61 per cent profit plunge for the third-quarter and saw two hedge funds it managed nearly collapse following the summer’s credit squeeze.

Jimmy Cayne, Bear Stearns chief executive, said the opportunity to create an alliance with Citic was the most attractive deal he had come across in 40 years.

“It’s a giant step into the most exciting market in the world,” he told the Financial Times. He added that he did not expect significant regulatory problems given the relatively small size of the deal.

Under the proposed alliance, Citic Securities will acquire $1bn worth of securities that will convert into a shareholding of about 6 per cent in Bear Stearns over 40 years. The Chinese brokerage also has the option to raise its holding to 9.9 per cent.

Bear will invest $1bn in securities that convert into a 2 per cent stake in Citic over six years. The US bank also has options to buy 3 per cent more over five years.

The companies will also set up a 50:50 joint venture, the first of its type involving a US and Chinese firm. The sides said the new company would offer a broad range of capital markets services across Asia.

The joint venture will combine Bear Stearns’ businesses in Asia, including its operations in Hong Kong, Tokyo and Singapore, while Citic Securities will contribute its operations in Hong Kong, Citic Securities International, and an undisclosed “financial consideration” to its partner.

Wang Dongming, Citic Securities chairman, said the allliance would enable it to provide new financial products to its domestic clients and to “improve clients’ access to global investment opportunities”.

Additional tidbits from Bloombers show what Bear gains from the deal. Not only does it hopefully boost its access to China, but the deal has been structured so that the Citic investment is Bear is treated as equity, while the Bear investment in Citic is, at least initially, regarded as a loan:

Bear Stearns Chief Executive Officer James “Jimmy” Cayne, 73, trails U.S. rivals in China, where he has struggled to build a business since opening a Beijing office in 1992. His company has fallen as much as 37 percent this year in New York trading, beset by the collapse of the U.S. subprime mortgage market. Surging defaults on loans to home buyers with poor credit histories pushed two of the firm’s hedge funds into bankruptcy and eroded its fixed-income revenue.

“Bear Stearns has been behind the curve internationally; this will help them catch up,” said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston. “It doesn’t hurt to get an investment from them while investing in China at the same time.”

China has accumulated positions in other financial companies outside its home market this year. China Investment Corp., the nation’s $200 billion sovereign wealth fund, paid $3 billion for a stake in New York-based private equity firm Blackstone Group LP in May. Barclays Plc, the U.K.’s third-biggest lender, agreed to sell 6.7 percent of itself to China Development Bank in July.

Beijing-based Citic will buy 40-year convertible trust preferred securities in Bear Stearns, and could increase its stake to 9.9 percent of the U.S. firm’s shares, the companies said. Bear Stearns will buy six-year convertible debt and five- year options in Citic.

The accord will give Bear Stearns access to Chinese firms looking to raise capital or invest outside of the country, the firm said. Bear Stearns clients will benefit from Citic’s relationships in the region, UBS AG analyst Glenn Schorr said in a report today.

The conversion prices will be based on the share prices of the companies in the five trading days before Oct. 19.

The investment by Citic should be considered equity by credit-rating agencies while Bear’s investment, at least initially, amounts to a loan, said Bruce Foerster, president of Miami-based advisory firm South Beach Capital Markets

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One comment

  1. john c. halasz

    Wall Street has been angling for years to open up China’s financial markets. (Fat chance that that would accord with Chinese strategic thinking). But who knows? Maybe China’s SWF will end up owning a large chunk of Wall Street. They have to do something with their trillion + hoard of depreciated dollars.

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