China Mobile Dials Up a Shanghai Bank Stake

(Caixin Online)Positive signals in late February gave credence to months of speculation that China's state-owned telecom giant China Mobile might buy a major stake in Shanghai Pudong Development Bank Co. (SPDB).

A strong signal came February 25, when SPDB shares rose 5.49 percent. That evening, the bank said it would suspend trading the next day in connection with a campaign to attract strategic investors.

The investor campaign was outlined the following morning with the release of a Guotai Junan Securities Co. Ltd. research report describing China Mobile's interest in SPDB. The report said SPDB planned to issue 2.2 billion new shares to China Mobile, giving the telecom an estimated 20 percent stake for around 40 billion yuan.

Details straight from the horse's mouth came March 3 when China Mobile and SPDB separately announced their talks aimed at strategic cooperation through a stock deal.

The proposed deal, which will require regulatory approval, could break new ground for China. Never before has a state-owned enterprise (SOE) obtained control of a medium-sized, publicly listed bank. The proposed tie-up would give the bank a new source of capital and help expand telecom services, such as mobile banking.

But several hurdles stand in the way. Some regulators are questioning the proposal. And on March 4, a source at SPDB told Caixin that "the deal is still being held up at the corporate level. It has already entered the final stage, even though it hasn't yet been reported to regulatory authorities for approval."

Lingering Doubts

Several doubts are pinned to China Mobile's need for regulatory support. Yet some observers say the telecom might be able to sidestep a potentially thorny regulatory review by the central government's State-owned Assets Supervision and Administration Commission (SASAC). The tactic, they say, might work if China Mobile buys the SPDB shares through a regional subsidiary.

Indeed, China Mobile is considering making its subsidiary Guangdong Mobile the primary investor, said Bank of Communications international telecom industry analyst Li Zhiwu. Using this path, he said, China Mobile could buy the SPDB stake without an SASAC review because the deal would be approved by the Guangdong Province SASAC. A local regulator presumably would go easy on the dealmakers.

The telecom group's finance companies would have to feed the necessary cash to Guangdong Mobile, which doesn't have enough of its own capital for the purchase. In 2008, Guangdong Mobile earned 20.84 billion yuan and reported net assets of 78.58 billion yuan.

Li said buying the bank shares through local subsidiary would improve China Mobile's chances of regulatory approval and greatly reduce policy risks.

Another reason for optimism about a China Mobile-SPDB linkup is that it would likely win support from the China Banking Regulatory Commission (CBRC), an analyst familiar with the matter said. That's because some Chinese banks are currently under pressure to refinance. And as long as an investing SOE doesn't hold a majority stake in a bank, CBRC apparently would not stand in the way.

But perhaps China Mobile shouldn't count its chickens before they're hatched. Another source cautioned that "naming a different primary investor will not actually change the reality of requiring SASAC's approval." The source also said SASAC has strict requirements that apply to state-owned enterprises seeking to invest outside their core business.

Some key regulatory officials outright oppose China Mobile's course. SASAC General Office Director Liu Nanchang told Caixin, "We are opposed to SOEs expanding into areas outside their core business." And SASAC has never supported "the integration of finance and industry," he said.

In 2009, SASAC sent a delegation to Japan to study the history and state of the country's integration of industrial and financial capital. Tight integration of financial and industrial capital in the 1990s forced financial institutions to accept dangerous levels of non-performing assets, hurting Japan's economy. Lessons from Japan's experience have influenced SASAC's cautious attitude toward industrial-financial integration.

In addition, the SASAC has been cautious on SOEs' investment in non-core business because profits from the company's non-core business activities would be cut in half when factored into after-tax net operating profits, which in turn influences appraisals.

Bank-Telecom Benefits

A close look at China Mobile's recent forays into the mobile phone payment business, and considering the telecom's gradual introduction of RF-SIM cards for mobile payments, sheds positive light on the SPDB stake plan.

China Mobile Chairman and CEO Wang Jianzho mentioned commercial benefits of the proposed bank deal at recent National People's Congress and Chinese People's Political Consultative Congress meetings in Beijing. "China Mobile will be able to use the deal with SPDB to expand its mobile phone payment business and move into mobile banking operations," he said.

Moreover, many experts have been advocating bank stake purchases by SOEs. For example Shi Lei, TX Investment Consulting chief strategist, said SOEs have positive cash flows and motivation to maintain quality by increasing value. Moreover, since bank stocks recently have been at historic lows, many say an equity investment could maintain value and ensure stable returns.

And banks such as SPDB could benefit from a cash injection, since any SOE that buys shares could help replenish bank capital.

Promoters of the China Mobile-SPDB proposal also say that the telecom would not interfere with the bank's overall strategic development.

China Mobile apparently has been searching for a bank to fit its company plans. One source, however, said SPDB was the telecom's last choice. China Mobile had been "shopping around everywhere" for a bank but apparently got a lot of rejections because its "demands" were considered too high, source familiar with the situation said.

Now that the speculation period is over, though, many analysts are upbeat. "Buying a stake in SPDB, a mid-sized joint equity bank, is China Mobile's optimal choice," said Li Wei, a telecom consultant at Analysys International.

Li predicted China Mobile would be able to bypass regulatory hurdles and eventually would get what it wanted – the right to make key business decisions as well as become SPDB's second largest stakeholder.

The bank's largest investor now, Shanghai International Group Co. Ltd. (SIG), would retain control after a potential China Mobile deal.

SIG currently holds 27.7 percent of SPDB shares. Based on current market estimates, issuing new shares to China Mobile would dilute SIG's stake to 22.16 percent, slightly more than China Mobile's share.

1 yuan = 14 U.S. cents