November 10,2009

Morgan Stanley's CICC Stake: What's It Worth and Who Will Get It?

By Scott Zhou, Shanghai

Morgan Stanley (MS) is on the lookout for a cash rich buyer for its 34.3% share of China International Capital Corporation, Limited, (CICC), one of top investment banks in



With China's economy well on the path of recovery and Chinese companies investing overseas and listing both on the A-share and overseas markets, MS is expecting a high valuation.


As the ripples of the financial crisis have spread across the world, CICC has attracted Wall Street and other international financial hub bankers, strengthening its reputation as the most internationalized of Chinese brokerages with the capability of cutting deals globally.


Half of the world's IPO deals in 2009 have been in China or concerned China-related companies. CICC, led by Levin Zhu, the son of former Premier Zhu Rongji, sits atop the dealmakers of China's overseas M&A business and has been underwriting almost all of the China's state-owned enterprises overseas investment, bringing it at times into head-to-head competition with MS.


Morgan Stanley China CEO Sun Wei says that MS is seeking for an exit from its stakes of CICC and is preparing a new business platform in China. Madam Sun says MS has no other choice but to sell its CICC stakes since it has become a passive investor of CICC.


It has been rumored that private equity firms Bain Capital and General Atlantic Group have both expressed interest in taking over the stake, for prices in the range of under US$1 billion to $1.2 billion-$1.5 billion.


By the end of June 31, 2009, CICC's assets amount to 22.7 billion yuan, with income 1.55 billion yuan and net income 315 million yuan, only half of its performance in 2007. A $1 billion offer sees a P/E of 10, a relatively low valuation considering CICC's bullish deal-making prospects in overseas listing and M & A.


This is the second time MS has sought to sell its CICC stake, the first being an effort in early 2008 to sell to PE firms that failed due to valuation disagreement.  CICC, China's first joint-venture investment bank, was founded by MS, which put in $35 million, and China Construction Bank (CCB) as the two biggest shareholders with stakes of 34.3% and 43.35%, respectively.


In the early days of CICC, MS saw the company as a foot in the door for developing its business in China, and sent in management talent to introduce advanced investment banking technologies to CICC. MS and CICC also cooperated in several projects.


But in later years, conflicts between shareholders deepened. By the late 1990s, MS had withdrawn its management from CICC, and from that point on MS was purely a financial investor, participating only in the dividend distribution. Although MS is still CICC's second biggest shareholder, the two companies have at times become competitors.


At the end of 2007, China further opened up its securities sector to foreign capital. With new policies in place, MS moved to form a new joint-venture company with China Fortune Securities, but regulators refused to sign off on that venture partly because MS still owns a stake in CICC. For now, it is not clear if China Fortune or someone else will partner up with MS.


MS could earlier have sold its CICC stakes for higher price. It is estimated that for 2007, a fat year for brokerages, CICC's net profit reached 1 billion yuan, with a return on asset rate of 100%. According to that valuation, MS's stake in CICC surpassed $1.5 billion.


PE companies have been those most interested in CICC stakes. Foreign banks looking at China for a score have already set up their own joint-venture securities companies, or they could set up joint-venture securities companies once the door is opened to them. In their own best interests, MS and CICC have decided that CICC's shares will not be sold to any other investment banks.


China Investment Corporation (CIC), China's sovereign wealth fund, may have a great deal of influence over who will buy MS's CICC stake. In September 2004, during the stock reform of China Construction Bank (CCB), 43.35% of the bank's shares in CICC were transferred to its subsidiary China Construction Bank Investment Corporation, which is also a subsidiary of China Huijin Investment (CHI), itself a subsidiary of CIC. Since CHI holds CICC, and CIC holds CHI, CIC is the biggest shareholder of CICC. Of perhaps greater consequence to the whole deal, CIC bought into MS with US$5 billion in 2007, and will therefore definitely play an important role in MS's decision

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