State-owned financial conglomerate CITIC Group will pay lower than expected to privatize its Hong Kong-listed arm CITIC International Financial Holdings (CIFH) and will finally inject it into mainland-based China CITIC Bank.

The privatization is widely believed to be part of CITIC Group's effort to facilitate the restructuring of its mainland and overseas financial platform, forming a tripartite collaboration between CIFH, CITIC Bank and CITIC Ka Wah Bank, a fully owned commercial bank of CIFH.

"Following the trend of internationalization of its mainland peers, the injection of CIFH into CITIC Bank can help the mainland bank tap into global opportunities through a unified brand," said Chang Zhenming, vice-chairman and president of CITIC Group.

But there is no timetable for the injection and it will be subject to approval of CITIC Bank's shareholders and regulators on the mainland and Hong Kong.

The acquisition price is widely considered too low. CITIC Group would offer shareholders one CITIC Bank H share plus HK$1.46 cash for each CIFH share they own.

Based on CITIC Bank's Hong Kong closing price at HK$5.44 on June 2, the offer represents HK$6.9 per share, or a 21 percent premium on CIFH's closing price of HK$5.7 before trade suspension on June 3. It represents 1.6 times the price-to-book ratio of CIFH.

CIFH's trading resumed yesterday in Hong Kong, with shares rising 8.25 percent to close at HK$6.17. CITIC Bank lost 4.81 percent to end at HK$4.95.

The offer would involve the issue of 1.746 billion CITIC Bank H shares and approximately HK$2.59 billion in cash, according to CIFH's statement. A cash offer would also be made to option and bond holders.

After the privatization, CITIC Group's stake in CIFH will rise to 70.33 percent from 55.16 percent, while Spanish shareholder Banco Bilbao Vizcaya Argentaria SA (BBVA)'s stake will double to 29.67 percent from 14.52 percent.

The Spanish bank has said it will spend 800 million euros in increasing its participation in both CIFH and CITIC Bank. After the deal, BBVA's stake in CITIC Bank will rise to 10.07 percent from 4.83 percent.

"CIFH's shares were undervalued in the past. Average share price excluding CITIC Bank is only HK$0.03. Therefore, I believe the acquisition price is very attractive," said Chang in response to the allegation that the offer price was too low.

CIFH will give up acquiring BBVA's Asian assets as planned before, while the foreign shareholders increase stakes in both CIFH and CITIC Bank.

"After valuing BBVA's Asian assets, we believe it is not suitable for us to merge with it," said Dou Jianzhong, CEO of CIFH, noting that there will still be other opportunities as BBVA has a strong business in South America.

As an overseas strategic partner, CIFH will continue to cooperate with BBVA in areas of risk management, human resources training, trade finance and wholesale banking, Dou said.

(China Daily June 12, 2008)