The saga of Morgan Stanley’s attempt to offload its 34.3% stake in China International Capital Corp (CICC) continues. Back in January 2008, the US financial firm announced its plan to sell its stake as a regulator-required prelude to pursuing a separate securities joint venture with Shanghai-based China Fortune Securities. At that time, US private equity firms TPG, JC Flowers and CV Starr were said to be front-runners in the race to buy the stake, but disagreements over valuation are said to have ended negotiations.
Its appetite for pursuing a securities joint venture with management control unsated – it has been silent partner in CICC since 2000 – Morgan Stanley is once again pursuing a sale and courting US private equity firms. TPG is back, along with Bain Capital, Carlyle, General Atlantic and Kohlberg Kravis Roberts in bidding for a stake that’s thought to be worth as much as US$1 billion. Adding a cross-strait twist, Morgan Stanley also included Taiwan’s Fubon Investment Bank to the short list.
Unfortunately for Morgan Stanley, any deal will remain difficult to execute for many of the same reasons that dogged negotiations back in 2008. In particular, there is the question of Levin Zhu, son of former Premier Zhu Rongji, and chief executive of CICC, who was criticized in 2008 for having done little to diversify CICC’s business. His strong influence, and concern over CICC’s strategic direction, led bidders to cut their initial bids in 2008; he remains a force today, and no sale by Morgan Stanley is likely to succeed without his blessing.
Add to that the influence of sovereign-wealth fund China Investment Corp (CIC), CICC’s largest shareholder and itself an investor in Morgan Stanley. Then there is the issue of phantom shares, originally granted to CICC management in a failed incentive to pursue an initial public offering, and which effectively reduce Morgan Stanley’s stake from 34.3% to 27.4%.
Morgan Stanley may be able to exit from its CICC stake in its second attempt. Whether it can do so on its own terms – or even on terms that it finds favorable – is an unanswered question.