China has approved the sale of HSBC's remaining $7.4 billion stake in Ping An Insurance to a group controlled by Thailand's richest man, allowing completion of the biggest equity purchase in the country by a foreign investor.
For HSBC Holdings, the sale marks its exit from a decade-long interest in China's second-biggest insurer and books it a $2.6 billion post-tax gain from selling what it no longer considers a core asset.
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Approval by the China Insurance Regulatory Commission (CIRC) had been in doubt after media reports last month raised questions over Thai conglomerate CP Group's funding for the deal.
State-run China Development Bank (CDB) did not provide finance for the purchase, despite being lined up for funding last month, people familiar with the matter told Reuters.
One of the sources, who is familiar with CP Group but not authorized to speak publicly, said the CDB credit facility was still in place but CP is not drawing it down as it became such a politically sensitive issue, and it could complete the deal without it.
Charoen Pokphand Group (CP Group), controlled by septuagenarian billionaire Dhanin Chearavanont, bought HSBC's 15.6 percent stake in Ping An in December for $9.4 billion, agreeing to pay up front for around a fifth of that stake last month, and the rest, backed by CDB, on approval by the Chinese regulator.
Payment for the second $7.4 billion tranche of shares was made in cash, HSBC and CP Group said in separate statements. Last month, HSBC had said the second tranche would be financed in part in cash and in part under a facility with CDB.
The first payment was supposed to be funded by wholly-owned CP subsidiaries, but local media reports said people not directly tied to the Thai food conglomerate were behind the deal, prompting CDB to voice its concerns. The bank would likely not want to anger Beijing by being involved in facilitating a non-mainland investment in Chinese stocks.
"If, after all this news, CIRC approved the deal, it indicates (the regulator) is comfortable that CP will be the holder. This will remove the overhang on the Ping An share price," said Edmond Law, a China insurance analyst at UOB Kay Hian.
The Thai group has interests spanning poultry and animal feed, supermarkets and auto making, and has a long history in China as the first multinational to invest in the country's agri-business in 1979. It was later tasked with helping to modernize China's farm sector.
The Ping An deal was Asia's second-biggest acquisition in 2012, behind Chinese oil firm CNOOC Ltd.'s planned $15.1 billion purchase of Canada's Nexen. Founded in 1988 as China's first joint-stock insurer, Ping An has grown into one of the world's largest, with 74 million clients, more than 175,000 employees and an army of some 500,000 agents.
The sale is part of HSBC's strategy of selling non-core assets and shrinking in many markets to improve profitability.
But some people were worried that Europe's biggest bank will lose about $1 billion in earnings contribution that it may struggle to replace.
"I understand strategically why they are doing it, but it will be dilutive to returns," said Ian Gordon, analyst at Investec Securities in London. "HSBC is short of earnings and long of capital and after this deal its emerging capital surplus — for which it has no avenues to deploy it — becomes even more pronounced," he said.
The capital boost from the sale should underpin dividend prospects, however, and offer greater flexibility as regulators in Europe act tougher on banks' capital requirements.
HSBC's London shares were down 0.3 percent, in line with a slightly weaker European banking index.
Before the Ping An sale, HSBC had already sold about $6.7 billion worth of assets, according to Thomson Reuters data, including non-life insurance operations and retail banking branches in places such as Thailand and the U.S.
HSBC sold the Ping An stake for HK$59 per share, for a total of HK$72.74 billion ($9.4 billion). The deal, given its size, was an important and sensitive sale for HSBC, and was personally overseen by CEO Stuart Gulliver, said a person with direct knowledge of the matter.
HSBC, which spent $1.7 billion building its Ping An stake between 2002-05, also has a 19.9 percent interest in Bank of Communications, China's fifth-largest lender, and owns 8 percent of unlisted Bank of Shanghai and 62 percent of Hong Kong's Hang Seng Bank, which in turn owns 13 percent of China's Industrial Bank.