Chinese state-backed investors are thinking about taking BMW’s main Chinese joint-venture partner Brilliance private, five individuals with knowledge of the matter informed Reuters, in the recent such deal targeting beaten down Hong Kong-listed stocks.
Shares in Brilliance China Automotive Holdings reversed losses and increased as much as 12.3% to HK$7.86 on Wednesday afternoon, their highest since August 17, after the news appeared. The company has a market value of $4.6 billion.
The deal to take it private would be headed by state-controlled Liaoning Provincial Transportation Investment Group. The company owns 12% of the automaker, the sources said.
The privatization would attract other Chinese state-backed investors and could kick off as soon as the fourth quarter of the year, said two of the individuals.
Liaoning’s state asset regulator and Brilliance’s parent, Huachen Automotive Group, said they had haven’t got any relevant information regarding Liaoning Transportation Investment Group that they are considering to lead the deal.
The companies have not commented on the report. The sources refused to be identified as the matter was confidential.
Based in the northeastern Liaoning province, Brilliance is 30% owned by Huachen Group, which is mainly owned by the provincial state asset regulator.
The regulator supports the proposal and Liaoning Transportation Investment Group has discussed with several banks regarding 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 revenues, way below the industry’s median multiple of 14.4.
Hong Kong’s market has also underperformed major competitors 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 dropped 10% in the same period.
The privatization would come ahead of BMW buying another 25% to take control of the JV – BMW Brilliance Automotive (BBA) – for 3.6 billion euros ($4.2 billion) in 2022.
Based on that offer, Brilliance’s existing 50% stake in the venture, which contributed to nearly all the listed company’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% after BMW boosts its share.
While the take-private proposal will not affect BMW’s plan to boost its stake in the JV, Brilliance’s valuation is likely to weaken after it loses control of the venture even though it is likely to continue to be profitable, the sources said.
Hong Kong-listed companies have declared take-private deals worth $17.8 billion so far in 2020, more than double 2019’s annual volume, often citing undervalued shares as a reason. The average premiums paid by buyers for those deals increased to 46% in 2019 and this year, from 34% in 2018.
Brilliance also owns 51% of a venture with French automaker Renault SA making vans and sport-utility vehicles, and a stake in an auto-financing company.
It has yet to be decided if Huachen Group prepares to divest its stake in Brilliance, said the people, adding the Liaoning government is preparing a major restructuring of the debt-laden group.
Huachen’s debt amounted to 133 billion yuan ($19.6 billion) as of the end of June, with short-term borrowings reaching 16.5 billion yuan. Its cash balance was 32.6 billion yuan, against 37.8 billion yuan at the end of the last year.
