By Julie Zhu and Yilei Sun
HONG KONG/SHANGHAI (Reuters) – Chinese state-backed investors are considering taking BMW’s main Chinese joint-venture partner Brilliance private, five people with knowledge of the matter told Reuters, in the latest such deal targeting beaten down Hong Kong-listed stocks.
Brilliance’s shares reversed losses and rose as much as 12.3% to HK$7.86, their highest since Aug 17, following the news report.
Brilliance China Automotive Holdings Ltd has a market value of $4.6 billion and the deal to take it private would be led by state-controlled Liaoning Provincial Transportation Investment Group, which owns 12% of Brilliance, said the people.
The privatisation would attract other Chinese state-backed investors and could kick off as soon as the fourth quarter of the year, said two of the people.
Brilliance’s parent, Huachen Automotive Group, said it had not obtained any relevant information about Liaoning Provincial Transportation Investment Group considering leading the deal to take Brilliance private.
Brilliance, Liaoning Provincial Transportation Investment Group, the provincial state asset regulator and BMW did not immediately respond to requests for comment. The sources declined to be identified as the matter was confidential.
Based in Shenyang city of northeastern Liaoning province, Brilliance is 30% owned by Huachen Group, which is majority-owned by the provincial state asset regulator.
The regulator supports the proposal and the Liaoning Provincial Transportation Investment Group has talked to several banks about financing, said three of the people.
Prospective investors believe Brilliance is undervalued in Hong Kong, the sources said, as the automaker is trading at 3.67 times expected earnings, way below the industry’s median multiple of 14.4, according to Refinitiv data.
Hong Kong’s market has also underperformed major peers so far this year, with the blue-chip Hang Seng Index down 16% as of Wednesday, compared with a 14% gain for China’s CSI 300. Brilliance shares have fallen 10% in the same period.
The move comes ahead of BMW buying another 25% to take control of the JV – BMW Brilliance Automotive (BBA) – for 3.6 billion euros https://www.reuters.com/article/us-bmw-jointventure-brilliance-china/bmw-to-gain-control-of-china-venture-in-new-era-for-foreign-carmakers-idUSKCN1MK2Z9 in 2022 under new ownership rules for foreign automakers.
Based on that offer, Brilliance’s current 50% stake in the venture, which contributed to almost all the listed firm’s profit in 2019, would be worth 7.2 billion euros ($8.4 billion), 83% higher than its market value. Its stake will halve to 25%.
While the move to take Brilliance private will not impact BMW’s plan to increase its stake in the JV, Brilliance’s valuation is likely to weaken after it loses control of the venture with BMW, even though it is likely to remain profitable, said the people.
Hong Kong-listed companies have announced take-private deals worth $17.8 billion so far this year, more than double last year’s annual volume, according to Refinitiv data, often citing undervalued shares as a reason.
The average premiums paid by buyers for those deals jumped to 46% in 2019 and this year, from 34% in 2018, the data showed.
(Reporting by Julie Zhu in Hong Kong and Yilei Sun in Beijing; Editing by Sumeet Chatterjee and Stephen Coates)