(Bloomberg) — Shares of Guotai Junan Securities Co. and Haitong Securities Co. surged when they resumed trading after unveiling the terms of their proposed merger to create a state-backed brokerage with $226 billion in assets to compete with Wall Street firms expanding in the country.
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Shares of both Guotai Junan and Haitong surged more than 100% in Hong Kong and by their 10% daily limit in Shanghai on Thursday, also catching up with the recent rally in Chinese and Hong Kong stocks that were spurred by China’s stimulus blitz announced last month. The stocks were suspended from Sept. 6 before Thursday’s resumption.
Under the share swap deal, Guotai Junan will issue A shares and H shares to all holders of its smaller rival Haitong at a ratio of 0.62 to 1. The exchange offer is worth 8.57 yuan in China, or a 2.3% discount on Haitong shares in Shanghai before they were suspended last month. In Hong Kong, the swap is worth HK$4.79 each, a premium of 32%, according to Bloomberg calculations.
In a move to replenish working capital, repay debts and fund the costs for the proposed merger, Guotai Junan plans to raise up to 10 billion yuan ($1.4 billion) from its controlling shareholder Shanghai State-owned Asset Management Co. via a share placement. The brokerage will place up to 626.2 million A shares at 15.97 yuan each, according to its plan.
The deal comes a year after President Xi Jinping urged regulators to cultivate a few top-ranked investment banks to compete with global firms in China. The combination of the brokerages will create a new entity with assets of 1.6 trillion yuan, topping Citic Securities Co. as the largest in the country.
The merger will boost the firm’s global footprint, giving it coverage in Hong Kong, Singapore, New York, London, Tokyo and Mumbai, the companies said in a joint statement Wednesday.
Upon completion of the deal, Haitong will be delisted from Shanghai and Hong Kong and the newly merged entity will adopt a new name with new management structure. The merger is pending approvals from shareholders and regulators. UBS Group AG is the financial adviser to Guotai Junan and DBS Group Holdings Ltd. advised Haitong.
Previous takeovers in China have typically taken about a year. However, considering the recent rapid pace of mergers among brokerages, such as between Guolian Securities and Minsheng Securities, which took less than a month from the submission of documents to being approved by the China Securities Regulatory Commission, subsequent mergers will likely accelerate, Founder Securities Co. analysts led by Xu Yishan wrote in a note on Wednesday.
China’s A share stock market has consistently recorded daily trading volumes exceeding 2 trillion yuan over the past two weeks, with brokerages mainly benefiting from the market surge.
Almost all brokerages canceled their Golden Week holidays to prepare for a busy trading session when markets reopened, according to state broadcaster China Central Television. The number of account openings at major brokerages hit a record high during the Golden Week break, with overwhelming client demand in both online and offline channels.
–With assistance from Zheng Li.
(Updates to reflect rally in shares in headline and first two paragraphs.)
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