Morgan Stanley on track for KKR/TPG CICC exit

Bain Capital, also believed to be in the final round of bidding, has meanwhile disappeared from the race.

The billion-dollar sale of the stake in CICC, whose majority owner is China Investment Corporation (CIC), attracted many major financial institution and buyout groups, including the Carlyle Group, General Atlantic, and Taiwan's Fubon Financial Holding Co. All were among the firms that passed an initial screening of bidders late last year, but had no luck in taking their bids further. Industry sources noted that KKR and TPG will evenly share the 34.3%, but also that formal permission to proceed still has to be obtained from the Chinese government.

Genesis of the deal

Sources note that Chinese Vice Premier Wang Qishan, head of Morgan Stanley's joint-venture partner China Construction Bank Corp., who oversees the financial-sector portfolio in the country's cabinet, could be a key mover for KKR and TPG to get approval for the deal. Other sources had indicated that few if any such major banking stakes would be open to foreign buyers in future.

Morgan Stanley has been eager to tap into China’s securities space through a partnership with local firms since Chinese government opened up the sector for foreign capital in late 2007. The US investment bank first started to unload its CICC holdings later that year, when it signed a preliminary agreement with Shanghai-based Fortune Securities to form a joint investment banking venture.

Morgan Stanley’s ostensible reasons for giving up its highly prized CICC stake while forming a JV were that the Chinese government had ruled that it could not own two joint venture investment banking operations in China, and that an exit from its CICC stake would be a precondition for it to win Beijing's approval for its new venture with Fortune. Morgan’s non-controlling position in CICC had in any case left the bank feeling that this was not an ideal marriage with Chinese securities house, and as early as the late 1990s it had already withdrawn from active management of CICC. Given these circumstances, Morgan Stanley finally decided to divest the stake that it had retained for some 15 years.

CICC as an asset

Since its formation in 1995, CICC has been a pioneer in the PRC financial markets, partly from its government connections, and has been heavily involved in China’s lucrative IPO market as one of the top underwriters. Last year, it became the top earner in this space, with RMB1.23 billion ($180 million) of fees from the listings of China Telecom, Industrial and Commercial Bank of China, and Baoshan Iron and Steel Co. CICC generated $96 million in after-tax profits in the first eight months of last year, from $439 million in revenue.

CICC is led by chief executive, Levin Zhu, the son of former Chinese premier Zhu Rongji, who has led its push to add research capabilities to become a major player in the bond market. Meanwhile, Morgan Stanley China has Wei Sun Christianson、52 years old, as China Chief Executive. She has strong connection with Vice President of CIC Gao Xiquing, dating from the late 1980s at Columbia Law School, where they studied together.

John Mack, Chairman of the Board at Morgan Stanley, was said to be leading the sale process in cooperation with his China lieutenant Christianson, who was put in charge of managing relationships with Chinese officials. He also reportedly assigned Charles Smith, a New York-based member of the firm's in-house strategic transactions team to execute the sale.

Challenges for the buyers

If they do successfully execute the sale, KKR and TPG may find challenges in deciding what to do with it. Although TPG led one of the most successful private equity investments in a China bank ever, through its Shenzhen Development Bank deal, AVCJ sources have consistently questioned the capabilities of private equity investors to add value to a banking operation. Banks, sources note, usually have money of their own, so private equity capital may be little help. Furthermore, especially in Asia, private equity professionals often share a banking background with their financial services targets, and can add little new industry expertise.

One challenge that would face KKR and TPG would be any future plans to take CICC public. As part of any IPO plan, they will need to work with CICC Chairman Li Jiange and Zhu on how to convert "phantom shares" issued by CICC's board as an incentive scheme for CICC staff into ordinary shares. Such a conversion would dilute the voting stake being purchased from Morgan Stanley from 34.3% to 27.4%. The "phantom share" plan already gives CICC staff 20% of the profits attributable to shareholders, reducing the economic value of Morgan Stanley's stake.

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• Topics
• Greater China
• Financials
• Buyouts
• Buyout
• Exits
• TPG Capital
• Bain Capital Asia
• The Carlyle Group
• General Atlantic
• KKR
• Morgan Stanley