FINANCE: Corruption, Market Turbulence Kill Citic’s Russell Bid

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Bottom line: The pending collapse of Citic Securities’ bid for Russell Investments is the direct result of company instability due to corruption allegations and stock market volatility, and highlights the risk of doing business with big state-run companies.

Instability sinks Citic’s bid for Russell

Recent turbulence in China’s corporate world may be set to claim one of its first big victims, with word that a deal to sell fund manager Russell Investments to top  Chinese brokerage Citic Securities (HKEx: 6030; Shanghai: 600030) is on the brink of collapse. London Stock Exchange Group has been looking to sell Russell for the last few months, and Citic had emerged as the preferred buyer after several others dropped out.

But Citic Securities has suddenly become a symbol of instability in China, hit by the one-two double whammy of corruption allegations and plunging profits for its core securities brokerage business. The recent corruption allegations against some of its top officials are part of a bigger national crackdown on graft, while the woes at its core brokerage business are the result of volatility in China’s stock markets.

More broadly speaking, this kind of turbulence could throw many major deals involving Chinese companies into doubt. The deals at greatest risk would be those involving major state-owned corporations like Citic Securities. That’s because many such firms have been at the center of a national corruption crackdown engineered by President Xi Jinping.

On the global stage especially, many western companies may shy away from doing deals with big Chinese firms that could be thrown into turmoil if one of their top executives gets detained or arrested on suspicion of corruption. Citic has been among the most globally acquisitive of China’s big state-run brokerages to date, buying a wide range of assets that include Hong Kong brokerage CLSA and a stake in US brokerage BTIG.

But the company’s global aspirations could be set for a pause, following ongoing turbulence from China’s plunging stock markets and the more recent corruption probe that has netted company President Cheng Boming, among others. Adding to the woes are China’s recent stock market rout, which should sharply undercut profits for Citic Securities and most of its peers that derive a big part of their profits from trading.

The turbulence has taken a toll on the company’s Hong Kong- and Shanghai-listed shares, which are both down by about a third since mid August. The instability was almost certainly a key factor behind the latest reports that say Citic Securities’ bid to buy Russell is on the brink of collapse, though the deal isn’t completely dead yet. (English article)

Back to the Drawing Board

LSE had been looking to sell Russell Securities as early as June, and was reportedly talking to several buyers in pursuit of a deal that sources said could be worth around $1.8 billion. Other names previously mentioned as potential buyers included Towers Watson and Chinese rival bidder Shanda. But media later reported that Citic had emerged as the lead bidder, and the other names dropped out.

Now the latest reports say LSE has begun talking with some of the previous bidders again, meaning Towers Watson and Shanda may be back in the picture. Shanda could become an aggressive bidder if it’s still interested, as the company comes from a private background and is less likely to get tangled up in any corruption investigations. What’s more, Shanda’s founder Chen Tianqiao is trying to build up his company as a private equity firm, following his recent decision to jettison his former entertainment empire.

At the end of the day, Citic Securities’ departure from the bidding for Russell is probably only a temporary setback for the company until the current market turbulence passes. Still, the issues that look set to derail this deal also provide a valuable lesson for foreigners who do business with big state-run firms, showing such companies carry political risk along with the usual financial risks.

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