Evergrande harks back to the Eighties

Vanke Overseas Investment Holding

16/08/2016 06:12

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are his own.) 
    By Quentin Webb 
    HONG KONG, Aug 16 (Reuters Breakingviews) - Evergrande 
 3333.HK  looks like an Eighties throwback. The Chinese 
developer is building the kind of conglomerate that fell out of 
fashion in the West decades ago. Debts are lofty. And now it is 
mounting raids on rivals. The combination is a hard look to pull 
off. 
    On Monday, Evergrande upped its stake in rival Vanke 
 1036.HK  to nearly 7 percent, meaning it has bet $2.2 billion 
on its larger peer in two weeks. It isn't clear what Evergrande 
hopes to achieve with Vanke, already the centre of an unusual 
battle for corporate control. But Evergrande now has more 
potential to influence the outcome.  
    Worryingly for Vanke, Evergrande is clearly ready to be 
aggressive in deal making. It has also recently amassed 15 
percent of the smaller Shanghai-listed Langfang Development 
 600149.SS , prompting the group's top backer to raise its own 
stake. That has not deterred Evergrande: Langfang recently said 
the predator could buy more shares and potentially seek control. 
    Other recent mergers and acquisitions include stakes in 
banks Shengjing  2066.HK  and Hua Xia  600015.SS . Overall, the 
M&A is scattergun and hard to decipher. It is not much help to 
call Vanke simply an investment, for example. That said, the 
deal spree could bring some benefits - Shengjing could open up 
new funding avenues. But if there is a master plan, it is not 
yet public. The stance is more mercurial corporate raider rather 
than disciplined strategic acquirer. 
    Zoom out, and Evergrande's attitude to debt harks back to 
the era when the junk bond came of age. Debts, plus perpetual 
securities, total a heady 373 billion yuan ($56 billion), and 
Moody's and Standard & Poor's ratings are respectively five and 
six notches below investment-grade. 
    That is partly the result of empire-building: Evergrande's 
interests stretch from healthcare and insurance to soccer, milk 
powder, and bottled water. The case for conglomerates is 
stronger in emerging markets, where businesses can benefit from 
the parent's existing financial and political connections. But 
in the United States and Europe, the argument that most 
companies should focus on doing a few things well, and leave the 
stock-picking to investors, is one shareholders won long ago. 
 
    On Twitter https://twitter.com/qtwebb 
     
    CONTEXT NEWS  
    - Reuters: Developer Evergrande raises China Vanke 
stake urn:newsml:reuters.com:*:nL3N1AW3V2 
    - Reuters:  Developer China Evergrande raises stake in goods 
trading company  urn:newsml:reuters.com:*:nL4N1AP1GD 
    - Reuters: Battle for China's top home builder Vanke heads 
into unknown as peer Evergrande takes stake  urn:newsml:reuters.com:*:nL3N1AM18E 
     
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    - For previous columns by the author, Reuters customers can 
click on  WEBB/   
 
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 (Editing by Una Galani and Kathy Gao) 
 ((quentin.webb@thomsonreuters.com;)(Reuters 
Messaging:)(quentin.webb.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINAVANKE/EVERGRANDE BREAKINGVIEWS