In a first step towards forming a new joint venture to tap China’s domestic securities market, Morgan Stanley (MS) has shortlisted bidders in an attempt to sell its 34.3% stake in China International Capital Corp. (CICC).
As reported in the Wall Street Journal, according to people familiar with the situation the list of bidders whose offers were considered attractive enough to conduct due diligence on the Chinese investment bank has been narrowed to include five U.S. private-equity firms: Bain Capital LLC, Carlyle Group LP, General Atlantic LLC, Kohlberg Kravis Roberts & Co., and TPG.
The other bidder selected to conduct due diligence is Taiwan’s Fubon Financial Holding Co. Fubon’s selection is surprising because cross-border investments involving Taiwan and mainland China in the financial industry remain sensitive, even as barriers to some cross-Straits investments have been removed under Taiwan’s current government.
The sale is seen as a crucial first step for the Wall Street firm to build a new securities platform in China. That’s because Chinese regulators have ruled that Morgan Stanley must first sell its passive stake in CICC before it can form a new joint venture to tap China’s domestic securities market.
Morgan Stanley has selected a broad field of candidates to conduct due diligence on CICC to improve the chances of getting a sufficiently attractive binding offer in the coming months. Bidders will review CICC’s books and interview management to determine the maximum amount they are willing to offer for the stake.
Morgan Stanley revived the sale process in recent months, asking for first-round indicative bids in early November. The Wall Street firm is hoping potential buyers could offer more for the stake than previous bids made in early 2008. Global economic recovery and a rebound in China’s investment-banking market could make its CICC stake more attractive.
However, the sale is not without complications. First, the CICC stake sale is politically sensitive. The securities firm’s largest shareholder is the country’s sovereign wealth fund, China Investment Corp., and CICC’s chief executive is Levin Zhu, the son of former Chinese premier Zhu Rongji. Support from both Mr. Zhu and the Chinese sovereign fund will be important in concluding a deal.
Second, Government of Singapore Investment Corp., another state-owned fund, which already owns a 7.35% stake in CICC, is reviewing its options to potentially increase its stake as part of the process, according to one person familiar with the situation.
And a third complication in the sale process is the existence of so-called “phantom shares” granted to CICC’s management as an incentive. These shares offer dividends like ordinary shares but don’t give their holders voting power or board representation. CICC’s management owns 20% of the company’s economic value through the phantom share program and Morgan Stanley’s 34.3% stake would be diluted to 27.4% if the phantom shares were converted to ordinary shares.
