Kerry Stokes has emphasised his very close links to China and the Chinese government by proposing to invest up to $US250 million of Seven Group Holdings cash into the forthcoming float of China’s Agricultural Bank, the weakest of the country’s big four banks that was all but broke in 2008 with non-performing loans equal to almost a quarter of its capital.
Stokes has the Caterpillar dealership in north-east China through Seven Group Holdings’ subsidiary, Westrac, has media interests in Shanghai and his wireless business in Australia has bought technology and systems from Huawei, the shadowy Telecoms equipment group that has emerged from nowhere in the past decade to be one of the flagship companies for China. Its founders were once senior officers with the People’s Liberation Army.
The fact that he has been sought out as a cornerstone investor in such a high profile float of a bank by the Chinese Government, indicates his influence and standing in official Chinese circles. He is very well connected.
His involvement in the IPO as a cornerstone investor puts Stokes is in the same group of influential foreigners as Standard Chartered Bank, Rabobank, Archer Midland Daniel, Hong Kong’s richest man, the main Singapore wealth fund and wealth funds from the Middle East. For all the bombastic talk of executives from BHP Billiton and Rio Tinto plus people like Twiggy Forrest about their links and knowledge of China, Mr Stokes is a key Australian businessman, so far as the Chinese Government is concerned.
No other Australian group, especially a bank, has been invited. So far he is only the second identified individual investor (Seven Group Holdings is his company, seeing he owns 66%) along with Hong Kong’s multi billionaire, Li Ka-shing (Hutchison Whampoa).
It is the first move by the just merged Seven Group Holdings, and will immediately raise questions about the use of the cash and remind the market of the ‘Stokes discount’ — the discount investors are applying to the shares for the company’s control by Stokes and his penchant for non-strategic investments.
When the Seven Network (the forerunner of Seven Group) was a listed company, it invested hundreds of millions of dollars from the KKR sale in a wide range of dividend paying companies (led by a big whack of Telstra shares) for the tax reducing-imputed dividend income, and took hundreds of millions of dollars in write-downs and losses as stockmarkets tanked in the global crash in late 2007 and through 2008.
He also used the cash to stalk West Australian newspapers and Consolidated Media Holdings. While both were media stocks, investors thought that the cash raised from selling 46% of Seven’s TV and magazines business to KKR, should have been used to reward other shareholders, or make a major one-off deal.
Then Stokes proposed to sell his privately-owned Westrac caterpillar earthmoving dealership and distributor into Seven Network in exchange for increasing his stake from around 48% in Seven Network to 66% in Seven Group Holdings, with the $1 billion in cash in Seven Network used to pay down Westrac debts of around $600 million.
Now the remaining cash is going to be used to buy a small, but highly visible stake in the $US23 billion IPO for Agricultural Bank.
Online reports earlier today revealed the Seven move: “Archer Daniels Midland, the US agribusiness group, will invest about $US100 million to $US200 million in the IPO, while Seven Group, a company controlled by billionaire Kerry Stokes with interests in media and heavy equipment, is likely to invest between $US100 million and $US250 million, as is Beijing’s tourism monopoly China Travel Services Group, people familiar with the deal said. Singapore’s United Overseas Bank is set to invest about $US100 million, they said.”
Other investors in the float include sovereign wealth funds from Qatar, Kuwait and Singapore, the London-based Standard Chartered Bank, and the Dutch financial services firm Rabobank, one of the world’s largest farm lenders (and a AAA rated bank), are other investors in the float.
Temasek, the Singapore state investment fund plans to invest $US200 million, and Li Ka-shing, Hong Kong’s richest man, is also an investor. Standard Chartered has agreed to take a $US500 million in shares, while Rabobank will buy $US 250 million. Both groups have entered into partnerships with Agricultural Bank.
Seven said in a statement this morning:
“In response to online news reports this morning, Seven Group Holdings Limited (“Seven”) announces that it has not received confirmation as to the success of its application for shares in Agricultural Bank of China’s (“ABC”) initial public offering (“IPO”) but it confirms it has applied for shares and expects a decision shortly.
“Seven has treated the situation as an incomplete proposal necessarily held in confidence but makes this announcement now in order to prevent the market being misinformed.
“On receiving confirmation Seven will update the ASX as to the value of any shares which have been allocated by ABC. The maximum value applied for is USD250,000,000. ABC is China’s largest bank by retail customers.
“Seven looks forward to its application being successful. The stake, if allocated, will be a strategic investment intended to further Seven’s links with and assisting its WesTrac business in North Eastern China.”
The Agricultural Bank was looking for some $US30 billion, but that was cut to around $US23 billion when the European downturn and euro crisis erupted and doubts about China’s economic health surfaced.
Seven and the other foreigners will buy shares in the Hong Kong issue in the IPO that will be worth a maximum of $US15 billion. The remaining $US8 billion will raised from Chinese investors and the shares will be listed on the Shanghai market.
China’s national pension fund (the National Council for Social Security Fund) has already invested a $US2.2 billion stake in the bank ahead of the IPO and will get 10% of the Hong Kong issues free of charge as a result. It will be the third biggest shareholder in the bank after China’s Ministry of Finance and China’s sovereign wealth fund (after a 2008 bailout).
Agricultural Bank is the worst run of China’s major banks. It is huge, sprawling across China, especially in the rural heartland, with hundreds of thousands of public servant employees. The money being raised is to help replenish the bank’s capital base after the lending splurge in China in 2009. Other major Chinese banks are raising cash for the same reason.
Agricultural Bank was bailed out by China’s sovereign wealth fund to the tune of $US19 billion in late 2008. The wealth fund bought non-performing loans and injected new capital into the bank. As a result, the bank’s non-performing loan ratio fell from almost 24% (it was essentially broke) at the end of 2007 to 2.9% at the end of 2009.