After a number of years battling for a larger say in some of the strategies of China International Capital Corp. (CICC), and fighting over whether or not they had exclusive right to partner with the large Chinese investment bank concerning international deals, Morgan Stanley (NYSE:MS) is close to selling their 34.3 percent stake in the company to Kohlberg Kravis Roberts & Co and TPG Capital, two private-equity companies.
Not content to simply be a silent partner, Morgan Stanley has been wanting to branch out into other Chinese securities ventures, but the China’s securities regulator determined they had to sell their stake in China International Capital Corp. before being allowed to enter other markets in the country. Morgan is also looking for ventures they have more control over, in contrast to the CICC deal.
This evidently fits in better with the two giant private-equity firms’ strategy, which seems to be to enjoy the exposure to the rapidly growing Chinese economy, rather than attempting to control the operations of CICC.
A report from the online Wall Street Journal did state that terms at this time would split the 34.3 percent stake evenly between Kohlberg Kravis Roberts & Co and TPG Capital, if the tentative deal stays as it is.
Another possibility is partners in the two firms, Kohlberg Kravis Roberts’ Henry Kravis and TPG Capital’s David Bonderman may be seated as members of the CICC board, effectively increasing the current five seats, which at this time includes one for Morgan Stanley.
One short-term scenario the two private-equity firms are looking to cash in on is CICC being taken public, which would give them a huge and immediate windfall, something it seems Morgan Stanley got tired of waiting for.
A sticking point there is the issuing of what were called “phantom shares” by the board of CICC, which were used as incentives for employees, but would cause problems when taking the company public as to how to convert them to common shares and how that would dilute the existing 34.3 percent stake currently held by Morgan Stanley, but could revert to 27.4 percent if there was an IPO.
Even now the workers at CICC are rewarded 20 percent of the profits, which would make the shares held by Morgan Stanley and anyone taking over their stake, much less valuable.
No matter though, CICC is considered the showcase Chinese investment bank, and a stake in the company promises some solid returns for years to come, with the short-term potential of an IPO fitting right into the strategy of quick gains normally looked for by private-equity companies.
