Itochu and CP Group in $10bn Citic stake deal

Citic, the Chinese conglomerate, has agreed to sell a 20 per cent stake to Itochu, the Japanese trading house, and Charoen Pokphand Group of Thailand in a deal worth $10.4bn that marks a big flow of foreign capital into a state-owned enterprise.

The tie-up comes on the back of a push by the Chinese government to reform SOEs to attract more private investment and improve corporate governance.

Citic said in a statement on Tuesday that Itochu and the privately held CP - through CT Bright, a 50-50 joint venture, - will split the investment evenly to acquire a fifth of the Hong Kong-listed company.

The deal, expected to be completed in October, will be done in two phases. CT Bright will buy 10 per cent of Citic from a subsidiary of its parent and a further 10 per cent in new convertible preferred shares. Those shares will not convert into ordinary shares until Citic reaches the minimum 25 per cent free float required by the Hong Kong stock exchange. Following conversion, CT Bright will own 20.6 per cent of Citic.

The tie-up will allow Citic to further expand its investor base after a reorganisation last year in which it injected $37bn of the holding company's assets into its Hong Kong-listed vehicle and signed up new anchor investors including Qatar Holding, Temasek, AIA and Tencent.

Chang Zhenming, Citic's chairman, said on Tuesday: "Not only have we brought in private investors, but they are attractive global conglomerates who will extend our reach."

With a stake in Citic, whose operations range from financial services and real estate investment to infrastructure, Itochu and CP plan to diversify more widely in China and elsewhere in Asia.

CP and Itochu already have a cross-shareholding deal, agreed in July, to develop agribusiness ventures to tap China's interest in securing a safe supply of food and water.

Masahiro Okafuji, Itochu's chief executive, said: "We hope to vastly expand our growth potential by creating businesses in emerging markets where we cannot venture alone. Itochu's 10 per cent stake in Citic would contribute about Y70bn-Y80bn ($592m-$676m) annually in consolidated profits.

The deal comes amid improved relations between Japan and China following a meeting between the countries' leaders in November.

While direct Japanese investment into Chinese conglomerates is rare, Citic has a history of ties with Japanese groups. Mr Chang trained at Daiwa Securities, the Japanese brokerage, in the 1980s after studying Japanese literature at college.

Itochu invested $100m in Citic's asset management arm in 2011, and Tokio Marine and Mizuho Bank are also investors in Citic.

CP has also been an active investor in China, and last year paid $9.4bn for a 16 per cent stake in Ping An, China's second-largest insurer.

Itochu's investment at $5bn would also be the biggest by a Japanese firm in China, eclipsing Nissan's $1bn investment into Dongfeng Motor in 2002, according to Dealogic.

The deal, announced as China released figures showing growth at the slowest pace in 24 years, sparked concerns among investors in Itochu was spending almost a third of its $17bn market capitalisation to buy its minority stake.

Polina Diyachkina, a Macquarie analyst, said: "Until now, they have not been able to generate significant profits from many of their Chinese operations by owning a minority stake. I'm slightly concerned that this time, it won't be different."

Itochu shares closed down 2.5 per cent on Tuesday in Tokyo, while shares in Citi closed up 1.5 per cent in Hong Kong.

Additional reporting by Michael Peel in Bangkok

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