The Great China IPO Haul
For massive mainland bank offerings like ICBC's, Western investment banks such as Goldman Sachs are ringing up billions in fees and pre-IPO stakes
by Brian Bremner
Ever since the Great Helmsman Mao Zedong nationalized China's banks more than 50 years ago, they have served as massive employment agencies, money pots for pet projects, and key props for the party apparatus. China's current generation of Communist Party power brokers hopes the initial public offerings of Industrial & Commercial Bank of China (ICBC) that will launch trading on Oct. 27 will dispatch that era to the historical dustbin and instead signal the start of a rich, new era of financial markets.
ICBC, China Construction Bank, Bank of China, and others have teamed up with the biggest names in Western finance—Goldman Sachs (GS), HSBC (HBC), American Express (AXP), Bank of America (BAC), and more—to help transform their banks into world-class competitors. And the finance wizards in New York, London, and Frankfurt are making an absolute killing thanks to this great China banking industry makeover.
Right now there is a symbiotic relationship between East and West in China finance. An ICBC needs the kind of global street cred that strategic investors like Goldman Sachs, Allianz (ALLZF), and American Express can bring for its global dual listing in Hong Kong and Shanghai. Yet few think they will be able to turn these lumbering mainland banks into globally competitive players overnight. Investment caps prevent them from gaining a majority stake—and hence a powerful management voice.
Staggering Sums
"Given foreign strategic investors' minority shares and their different level of familiarity with the Chinese operating environment, it is difficult for them to exert significant influence on the corporate governance," says May Yan, senior vice-president and a credit analyst with Moody's Investor Services in Hong Kong, in a recent interview.
Overseas financial institutions want access to an emerging financial market that could blossom into one of the world's biggest profit machines as its banks make lucrative loans, the local bourses take off, a bond market develops, and consumers learn the joys of credit cards, mortgages, and personal finance.
Short term, there are staggering sums to be made taking Chinese financial institutions public—and investing in them at bargain prices before they go public. "The sheer size of the deals coming out of China is translating into these large fees for investment banks," says Matthew Toole, an analyst at Thomson Financial.
Getting In, Pre-Ground Floor
The expected $22 billion-or-so ICBC initial public offering, the biggest ever and one for the history books, has already enriched big strategic backers such as Goldman, Allianz, and American Express. They will own about 5% of the bank after its listing. They were given the opportunity at less than half the price at which ICBC shares were eventually priced given the overwhelming level of demand.
Before the stock has even started trading, this trio is sitting on paper gains of about $3.6 billion. And given that the ICBC stock was 10 times oversubscribed, a strong trading debut is extremely likely. Global investors covet Chinese banking stocks because they provide a pretty good proxy for China's hypergrowth economy.
Other big Chinese banks that have held huge offerings over the last year or so have continued to perform well as listed stocks. The shares of China Construction Bank, which raised more than $10 billion about a year ago, are up more than 50%—all of which is sweet news for Bank of America, a major investor. Again, Bank of America was in the money before the first China Construction Bank trade.
Bank of America committed $3 billion to buy a minority stake in China Construction Bank, a big chunk of which came before the bank listed. It bought prelisted shares at about 1.15 times the book value of the bank, and today shares trade at roughly 2 times book value.
A Yangtze of Deals
For big underwriters and book runners such as Goldman, Morgan Stanley (MS), Deutsche Bank (DB), and Credit Suisse (CS), China finance is another money bonanza given the sheer volume of IPO activity. Morgan Stanley raked in about $100 million in investment banking fees in 2005, and Goldman has nabbed about $64 million so far this year. True, the underwriting fees commanded by Western investment banks tend to be in the 2.5% to 3.0% range, about half the average fees one sees in the U.S., according to Toole.
However, the deal flow is awesome and average deal size of IPOs coming to market has increased from $100 million or so in 2002 to $500 million this year. True, this year has been distorted by the monster ICBC listing, and next year the overall dollar value of share listings will be far lower. Yet few doubt that China will remain one of the hottest equity raising and merger and acquisitions markets on the planet.
Over the next year or so, China Communication, a telecom, is expected to raise about $2 billion in an offering, and financial firms such as China CITIC Bank, Bank of Beijing, and Guangdong Development Bank are likely to raise about $1 billion each. Right now at least, there is an awful lot of hanging fruit out there for Western investment bankers to pick.
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