Bank of America to Pay $7 Billion for China Construc ...

Bank of America to Pay $7 Billion for China Construction Stake

By David Mildenberg and Luo Jun
More Photos/Details

Nov. 18 (Bloomberg) -- Bank of America Corp. will pay about $7 billion to almost double its three-year-old stake in China Construction Bank Corp., three weeks after being awarded $15 billion from the U.S. government to thaw frozen credit markets.

Bank of America, which is buying Merrill Lynch & Co., will boost the stake in China's No. 2 bank to 19.13 percent from 10.8 percent, the Charlotte, North Carolina-based lender said today. It will buy shares from China SAFE Investments Ltd., a state investment arm that is the Beijing-based bank's biggest stakeholder.

Bank of America isn't funding the purchase with proceeds from the government's Troubled Asset Relief Program, or TARP, said spokesman Scott Silvestri. Merrill received $10 billion through the Treasury's $250 billion bank-rescue package.

``This is falling closely on the heels of their receiving TARP money, which was intended to spur lending in the U.S. or have bigger, stronger banks buy the failing banks,'' said Jaime Peters, an analyst at Morningstar Inc. in Chicago. ``But neither of these things is happening.''

Bank of America first invested in China Construction in June 2005, buying a $3 billion stake before the lender was publicly listed. It invested another $1.9 billion in June. The value of its holding almost tripled, to $14.5 billion, as of Sept. 30, a regulatory filing showed.

Bank of America will buy China Construction shares at 1.2 times audited book value as of Sept. 30, the Chinese bank said in a separate statement, without elaborating. China Construction's unaudited book value per share was 2.05 yuan, according to its third-quarter report, and the bank will announce audited results on Nov. 21.

40 Percent Discount

The terms suggest Bank of America will pay as much as $7 billion, or 2.46 yuan per share, to increase the stake. That is 40 percent below the Chinese bank's closing price in Hong Kong today. The transaction, to be completed by the end of November, will raise Bank of America's holding to 44.7 billion shares.

Hong Xiaoping, an investor relation officer at China Construction, confirmed the price for the stake.

Bank of America plans to be ``a long-term and significant strategic investor in CCB,'' the U.S. lender said in a statement. The new shares can't be sold until Aug. 29, 2011, without the Chinese bank's consent. The stock Bank of America bought in 2005 became eligible for sale last month, prompting analysts to suggest the U.S. lender would sell part of its stake to boost capital.

Analysts and politicians should focus on how both sides can benefit from the deal, said Daniel Rosen, principal of Rhodium Group, a New York firm that advises companies on overseas investments. ``People should be delighted that Bank of America is thinking long-term about its options and isn't just barricaded in their shack out in the woods,'' he said.

Job Losses

Bank of America Chief Executive Officer Kenneth Lewis slashed his dividend by half after reporting a 68 percent drop in third-quarter profit because of rising losses on consumer and business loans. The bank has raised $22 billion by selling common and preferred shares this year, including $10 billion in October to help pay for its Merrill Lynch acquisition.

Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31.

``Banks have entered the political world and everything they do is going to be under the political microscope,'' said Christopher Whalen of Institutional Risk Analytics, a Torrance, California-based research firm. ``Ken Lewis can say it's a good investment and he can probably get away with it if he doesn't have to take any more government money.''

Chinese Lenders

China Construction said last month that third-quarter profit rose 12 percent on higher interest income. Still, China's six largest listed banks will probably report declining profits next year as lower interest rates shrink margins and loan defaults increase, HSBC Holdings Plc said in a Nov. 12 research note.

``China Construction Bank is tightly tied to the government and they are a preferred bank,'' said Richard Wottrich, managing director of Dresner Partners, a Chicago-based investment banking firm. ``China will probably return the favor someday by doing something for Bank of America if they need help.''

China Construction Bank shares have increased 73 percent since its initial public offering in October 2005. Bank of America has declined 61 percent in that period and fetched $15.03, the lowest since August 1995, at 4:30 p.m. in New York Stock Exchange composite trading.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net
Last Updated: November 17, 2008 19:58 ESTBank of America to Pay $7 Billion for China Construction Stake

By David Mildenberg and Luo Jun
More Photos/Details

Nov. 18 (Bloomberg) -- Bank of America Corp. will pay about $7 billion to almost double its three-year-old stake in China Construction Bank Corp., three weeks after being awarded $15 billion from the U.S. government to thaw frozen credit markets.

Bank of America, which is buying Merrill Lynch & Co., will boost the stake in China's No. 2 bank to 19.13 percent from 10.8 percent, the Charlotte, North Carolina-based lender said today. It will buy shares from China SAFE Investments Ltd., a state investment arm that is the Beijing-based bank's biggest stakeholder.

Bank of America isn't funding the purchase with proceeds from the government's Troubled Asset Relief Program, or TARP, said spokesman Scott Silvestri. Merrill received $10 billion through the Treasury's $250 billion bank-rescue package.

``This is falling closely on the heels of their receiving TARP money, which was intended to spur lending in the U.S. or have bigger, stronger banks buy the failing banks,'' said Jaime Peters, an analyst at Morningstar Inc. in Chicago. ``But neither of these things is happening.''

Bank of America first invested in China Construction in June 2005, buying a $3 billion stake before the lender was publicly listed. It invested another $1.9 billion in June. The value of its holding almost tripled, to $14.5 billion, as of Sept. 30, a regulatory filing showed.

Bank of America will buy China Construction shares at 1.2 times audited book value as of Sept. 30, the Chinese bank said in a separate statement, without elaborating. China Construction's unaudited book value per share was 2.05 yuan, according to its third-quarter report, and the bank will announce audited results on Nov. 21.

40 Percent Discount

The terms suggest Bank of America will pay as much as $7 billion, or 2.46 yuan per share, to increase the stake. That is 40 percent below the Chinese bank's closing price in Hong Kong today. The transaction, to be completed by the end of November, will raise Bank of America's holding to 44.7 billion shares.

Hong Xiaoping, an investor relation officer at China Construction, confirmed the price for the stake.

Bank of America plans to be ``a long-term and significant strategic investor in CCB,'' the U.S. lender said in a statement. The new shares can't be sold until Aug. 29, 2011, without the Chinese bank's consent. The stock Bank of America bought in 2005 became eligible for sale last month, prompting analysts to suggest the U.S. lender would sell part of its stake to boost capital.

Analysts and politicians should focus on how both sides can benefit from the deal, said Daniel Rosen, principal of Rhodium Group, a New York firm that advises companies on overseas investments. ``People should be delighted that Bank of America is thinking long-term about its options and isn't just barricaded in their shack out in the woods,'' he said.

Job Losses

Bank of America Chief Executive Officer Kenneth Lewis slashed his dividend by half after reporting a 68 percent drop in third-quarter profit because of rising losses on consumer and business loans. The bank has raised $22 billion by selling common and preferred shares this year, including $10 billion in October to help pay for its Merrill Lynch acquisition.

Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31.

``Banks have entered the political world and everything they do is going to be under the political microscope,'' said Christopher Whalen of Institutional Risk Analytics, a Torrance, California-based research firm. ``Ken Lewis can say it's a good investment and he can probably get away with it if he doesn't have to take any more government money.''

Chinese Lenders

China Construction said last month that third-quarter profit rose 12 percent on higher interest income. Still, China's six largest listed banks will probably report declining profits next year as lower interest rates shrink margins and loan defaults increase, HSBC Holdings Plc said in a Nov. 12 research note.

``China Construction Bank is tightly tied to the government and they are a preferred bank,'' said Richard Wottrich, managing director of Dresner Partners, a Chicago-based investment banking firm. ``China will probably return the favor someday by doing something for Bank of America if they need help.''

China Construction Bank shares have increased 73 percent since its initial public offering in October 2005. Bank of America has declined 61 percent in that period and fetched $15.03, the lowest since August 1995, at 4:30 p.m. in New York Stock Exchange composite trading.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net
Last Updated: November 17, 2008 19:58 EST