A failed Ping An sale could leave HSBC red-faced, but richer. If regulators veto the UK bank’s $9.4 billion plan to offload its near-16 per cent stake in the Chinese insurer, HSBC’s reputation will take a knock. But it could still end up financially better off.
Selling the stake to Charoen Pokphand, a company controlled by Thailand’s richest man, had obvious appeal. The two-stage deal offered HSBC a clean exit from an investment that, while lucrative, offered no strategic benefits. CP Group appeared to have the blessing of the Chinese authorities, which can stop any investor from owning more than five per cent of an insurer. And unlike other Western banks that sold their Chinese financial stakes at a discount, HSBC negotiated a premium to Ping An’s market price.
A month on, however, the deal is wobbling. Chinese media have raised questions about the ultimate source of funds used to purchase the initial 3.2 per cent tranche. China Development Bank, which is part-financing the remaining 12.3 per cent stake, appears to have concerns. China’s Insurance Regulatory Commission may reject it, according to the South China Morning Post. If the regulator does not give the go-ahead by February 1, both sides can walk away.
A failed deal would be embarrassing for HSBC, which makes a virtue of its long history and deep relationships in China. Finding another buyer for the remaining 12.3 per cent would also be tricky — especially as they would also need regulatory approval. Selling the shares in the market is a challenge: the remaining stake amounts to 31 per cent of Ping An’s Hong Kong-listed shares, and a hefty 67 times the average daily turnover in the stock. The overhang would be bound to depress Ping An’s shares.
Fortunately, after the recent market rally, Ping An shares are almost 15 per cent higher than the price at which HSBC originally agreed to sell. That means it could now accept an 11 percent discount to the market price and still be slightly better off than under the original transaction. A failed Ping An sale would be a reputational blow for HSBC. But it need not be a financial one.