CITIC Securities, China’s biggest brokerage, is in the process of investing US$1 billion into Bear Stearns, the US investment bank hobbled by the US subprime exposures. The move is part of an exclusive strategic alliance to form a joint venture Asian investment bank giving the beleaguered bank a foothold in the world’s best performing stockmarket.
The Beijing-based CITIC Securities, an arm of state-controlled CITIC Group, will pay about US$1 billion to subscribe to 40-year convertible preferred shares that can be swapped into about 6% stake in Bear Stearns, according to the two company’s agreement. The Chinese brokerage also has the option to raise its holding to 9.9%.
In turn, Bear Stearns will acquire a similar stake in CITIC through a six-year convertible debt security. Bear Stearns will also have the option to acquire additional shares up to 9.9% stake in CITIC Securities. The conversion price will be based on the share prices of the two institutions in the five trading days before October 19.
The two firms have agreed to team up to sell financial products and services in China and plan to open a Hong Kong-based joint venture for the other Asian markets. The venture would pool together both firms’ businesses in Asia, with the exception of China. However, it would include some collaboration in China giving Bear Stearns access to some of CITIC’s clients.
The partnership should help CITIC Securities to build up its existing business and provide new financial products and services to domestic clients. It will also provide them access to global investment opportunities, according to Wang Dongming, chairman of CITIC Securities.
The deal came amid speculation of a larger sell down of Bear Stearns’ stakes following the plunging values in US mortgages and derivative securities. The problems in the subprime space have already caused the demise of two of its hedge funds and losses at its flagship mortgage business. CITIC Securities is gaining entry to the US market at a relatively cheap price as Bear’s share price has plummeted more than 28% this year.
As the strategic alliance develops, it is envisioned that each firm will have a representative on each other’s board of directors. The transaction is still subject to the signing of the definitive agreements.
