Goldman raises $1.1b in ICBC stake dilution

Last week, Goldman divested $1.1 billion worth of shares in ICBC, marking its third sell-down since buying a 4.9% stake in 2006. Goldman's three divestments - the others in June 2009 and September 2010 -have collectively generated $5.26 billion, earning a substantial return on its $2.58 billion initial investment.

It is comfortably the largest open market exit ever made by a private equity investor in China, according to AVCJ Research. The Carlyle Group places second, having so far raised $3.64 billion from three sell-downs in China Pacific Insurance.

"The value of our holding has appreciated considerably and we have modestly reduced the size of our investment over time, but we intend to remain a very significant long-term shareholder in ICBC," a Goldman spokesman said of the latest stake sale.

Despite ICBC continuing to hold long-term promise for Goldman, the medium-term outlook has been soured by concerns about risk exposure at China's major banks. These lenders participated in a government-mandated credit expansion in 2009 and, as growth slows, the money might not be there to repay the debts. According to Standard Chartered, local government investment vehicles alone are sitting on $1.5-2.1 trillion in loans and China's banking regulator estimates that $300-450 billion are already in trouble. An IMF report released Tuesday also identified a "deterioration in loan quality due to rapid credit expansion" as a key risk facing China and its banking system.

Goldman is well aware of these realities. Last month, it posted its second quarterly loss since its 1999 float, and revealed that certain Chinese investments attributed to these woes. In particular, the value of its ICBC holdings dropped by more than $1 billion due to a dip in the bank's market value. The investment was valued at about $5 billion at the end of September, compared to $7.59 billion in December 2010.

Suggestions that Goldman was jettisoning shares to minimize exposure to future uncertainty were given credence by the pricing of the deal: More than 1.75 billion ICBC shares were sold at HK$4.88 apiece, which represented a 6% discount to ICBC's last closing price. Goldman planned to sell 2.4 billion shares at HK$4.88-HK$5.0 each, a term sheet indicated, but the divestment was scaled back due to market volatility.

Days after Goldman made its stake sale, Bank of America divested the majority of its remaining shares in China Construction Bank (CCB) - equivalent to 4% of the company - for nearly $6.6 billion. It retains a 1% stake.

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• Topics
• Financials
• Greater China
• Exits
• Goldman Sachs
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• China
• Financial Services