Citic's Close Call with Bear Stearns
The unit of a Chinese state-owned conglomerate has shelved a deal to
buy Bear Stearns shares at $120 apiece
by Sameera Anand
March 19, 2008
http://www.businessweek.com/globalbiz/content/mar2008/gb20080319_886607.htm?chan=search
Citic Securities confirmed yesterday that it would not proceed with
its investment in Bear Stearns, allowing it to scrap a deal to buy
shares at $120 apiece in a bank which currently trades at $6. But a
host of other investors who have bought into Citi, Merrill Lynch,
Morgan Stanley and UBS are stuck with paper bought at significantly
higher prices than current traded levels.
Citic Securities, which is part of Chinese state-owned conglomerate
Citic Group, started talking to US investment bank Bear Stearns in the
third quarter of 2007 after two Bear Stearns hedge funds were reeling
from subprime losses and the investment bank had posted a large drop
in profits. On October 22 the two firms announced they had inked an
agreement for a strategic partner****p.
Citic was to buy $1 billion worth of 40-year preferred securities
convertible into about 6% of Bear Stearns equity. The conversion price
of Citic's investment into Bear Stearns was around $120, based on the
last five days traded prices at the time. Bear Stearns had traded down
from a January 2007 high of $171 leading some market commentators to
observe that Citic had got itself a bargain. The arrangement was
somewhat reciprocal as Bear Stearns would eventually invest $1 billion
in Citic's equity, based on Citic's traded share price.
Bear Stearns' share price lost ground all of last week as investors ?
correctly ? feared the worst and closed at $30 on Friday. Then
JPMorgan bailed out the beleaguered investment bank over the weekend
at a price of $236 million, which translates to a valuation of around
$2 per share. Bear Stearns' shares lost 84% on the news, fini****ng at
$4.81 on Monday but gained some ground on Tuesday to trade up to $7
before closing around $6.
Citic said yesterday it will not be going ahead with the investment,
which was still awaiting approvals. But while this ended up being just
a close call for Citic, other investors who bailed out
subprime-affected banks have not fared as well.
Just a few weeks after the Citic-Bear Stearns tie-up, Citi said the
Abu Dhabi Investment Authority would invest $7.5 billion to buy up to
4.9% of the bank. Citi issued equity units to ADIA that are
convertible into common shares at a price between $31.83 and $37.24
per share. Until conversion in tranches in 2010 and 2011, the
securities carry a coupon of 11%, payable quarterly. Citi's shares
closed at $30.70 the day the markets learned of the ADIA investment.
Then UBS announced that the Government of Singa****e Investment
Cor****ation (GIC) and an undisclosed strategic investor in the Middle
East would jointly invest SFr13 billion ($13.2 billion) to take a
10.5% stake in the Swiss bank. The investors bought notes convertible
in two years, bearing a coupon of 9%. The shares traded at SFr57.2 on
December 7. The conversion price is an average of the December 7 price
and the volume-weighted average price of the three trading days prior
to the extraordinary general meeting at which the issuer would seek
approval, subject to a floor of SFr51.48 and a ceiling of SFr62.92.
UBS currently trades at SFr26.02.
On December 19 China once again stepped up to the plate with China
Investment Cor****ation agreeing to a $5 billion infusion to acquire a
stake of up to 9.9% in Morgan Stanley. The US investment bank issued
equity units, bearing a coupon of 9% per annum payable quarterly,
convertible into Morgan Stanley shares in August 2010. The conversion
price was based on traded prices the week of December 17, with a floor
set at a premium of 20% to the reference price. The reference price
was $48.07-$57.68 per share.
Morgan Stanley traded yesterday around $41.
Merrill Lynch's gift to shareholders came on Christmas Eve when it
announced Temasek and Davis Selected Advisors would subscribe to $6.2
billion of stock at a price of $48 per share. Merrill Lynch traded at
$56 the morning of the announcement, so Temasek and Davis seemed to
have got a good deal buying at a 14% discount to the traded price
(though the investors bought straight equity so got no fixed coupon).
January brought both Citi and Merrill Lynch back on the road for
another round of capital infusion.
|
