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HSBC's Ping An Stake Sale at Risk Over Funding Doubts: Report

Peter Ma
Jerome Favre | Bloomberg | Getty Images
Peter Ma

HSBC's sale of its $9.4 billion stake in Ping An Insurance to Thailand's CP Group has been thrown into jeopardy after state-run China Development Bank (CDB) voiced concerns over funding for the deal, sources told Reuters.

A collapse of the deal, Asia's second-biggest M&A transaction announced last year, would rob HSBC Holdings of a $2.6 billion post-tax gain and set back its plans to shed non-core assets.

"Indeed, there are some problems," said one of the sources, referring to CDB's role in the sale. The sources were not authorized to speak publicly on the matter.

HSBC agreed late last year to sell the 15.6 percent stake in Ping An to CP for HK$59 per share. The bank said in a Dec. 5 statement the sale of its stake in the world's second-largest life insurer by market value would be completed in two stages.

About a fifth of the holding was to be transferred to the Thais on Dec. 7.

CP, controlled by Thailand's richest man, Dhanin Chearavanont, said it would purchase the shares through four British Virgin Islands companies - All Gain Trading Ltd, Bloom Fortune Group Ltd, Business Fortune Holdings Ltd and Easy Boom Developments Ltd - which it said are wholly owned subsidiaries.

The rest of the purchase is financed by the Hong Kong branch of CDB, and is subject to approval by the China Insurance Regulatory Commission (CIRC), HSBC said at the time.

Late last month, media reports in China and Hong Kong said the first CP payment came from funding sources not directly tied to the Thai conglomerate, as opposed to the wholly owned CP units as agreed previously.

(Read More: China's Ping An Eyes Legal Action After NYT Report)

If CDB decides to withdraw its funding support for the deal, CP would have to scramble to find another large lender to back the acquisition quickly following the CIRC approval due Feb. 1.

CP, whose core food businesses are poultry and animal feed, declined to comment, as did HSBC and Ping An.

Ping An's Shanghai-listed shares closed down 3.7 percent at 45.44 yuan on Tuesday, while its Hong Kong shares ended down 4 percent at HK$68.15.

By 1320 GMT HSBC's London shares were down 0.7 percent, underperforming a 1 percent rise in Europe's bank index.

Interests in China

Dhanin, worth $9 billion according to Forbes magazine, already has major business interests in China ranging from agriculture to retail to auto manufacturing.

CP was the first multinational to invest in China's agri-business in 1979, and under Beijing's latest five-year plan, it was tasked with helping to modernize the Chinese farm sector. It also operates Lotus supermarkets in Shanghai, according to the company's website.

The Ping An sale, given its size, is an important and sensitive deal for HSBC, which spent $1.7 billion building its stake in the Chinese insurer between 2002 and 2005.

The deal was widely welcomed by HSBC analysts and investors at the time for crystallizing the gain on a non-core asset.

(Read More: Carlyle Bags $4 Billion Profit From China Insurance Exit)

But the bank faces a challenge replacing lost income from recent asset sales, including Ping An, according to Ian Gordon, analyst at Investec Securities in London. "Looking into 2013, the loss of an Associates contribution of c.$1 billion pa leaves a gap to fill, with no obvious solution immediately at hand," he said, downgrading his stance on the bank to "hold" from "buy".

The South China Morning Post on Tuesday said CDB was reconsidering its decision to back the CP-Ping An deal, citing people familiar with the situation.

CDB's concern stems from the various media reports that trace CP's first payment for the deal to outside sources, the Post reported.

Ping An has been in the news since late last year after a series of reports by the New York Times. One report in October, citing corporate and regulatory records, said the family of China's outgoing Premier Wen Jiabao had amassed $2.7 billion in wealth at one point, the biggest source of which came through stakes in Ping An.

Wen, who went on a state visit to Thailand at the end of November, is due to step down as premier in March.

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