A Big Successful Story in China (TPG)

HONG KONG -- TPG is close to a deal to offload at least part of its $1.5 billion controlling stake in Shenzhen Development Bank Co. to China's No. 2 insurer, providing an exit route for the U.S. private-equity firm's highest-profile investment in China.

Ping An Insurance (Group) Co. of China is in advanced talks with TPG and Shenzhen Development to boost its stake in the Chinese bank by subscribing to new shares in a placement by the bank and taking at least some of TPG's shares, according to people familiar with the situation. The negotiations over the two-stage deal could be hammered out this week, the people said. The exact terms of the sale couldn't be determined, and the situation could change.TPG's sale is expected to garner a spectacular return, justifying the risky bet it placed on the Chinese bank five years ago. Based on Shenzhen Development's last trading price, TPG's stake is worth $1.5 billion, 10 times the roughly $150 million TPG's Asian arm Newbridge Capital paid for the shares in 2004. TPG's control of the bank could allow it to extract a premium to Friday's closing price of 20 yuan ($2.93) apiece.Shares in both Shenzhen Development and Ping An were suspended Monday pending announcements.The selldown of TPG's 17% controlling stake in Shenzhen Development would be a landmark because TPG is the only foreign investor to own control of a Chinese bank. It has worked hard to overhaul the bank's risk management and cement its control.TPG is able to control the bank with its 17% holding because the Chinese lender's shares are widely held.TPG furthered its control by appointing a former U.S. Treasury deputy secretary, Frank Newman, as chairman of the bank and has worked since the 2004 purchase to stack the bank's board with allies.When TPG invested in Shenzhen Development, foreign investors were wary of touching Chinese banks because of balance sheets laden with nonperforming loans racked up by years of state-directed lending. Shenzhen Development had similar problems to other lenders and received less government support to clean its balance sheet than its bigger state peers, making the bank's turnaround a major endeavor.Talks over the sale come after Shenzhen Development's shares have more than doubled this year as expectations for a rebound in China's economy grow. TPG's exit timing appears to be more opportunistic than sales by several Western banks that have unloaded their Chinese bank holdings this year under pressure from regulators to raise capital.After much wrangling, TPG sealed the deal in 2004 that gave it effective control over the bank and assuaged regulators with an agreement for a five-year lockup on the stake when it purchased the shares. That lockup is scheduled to expire later this year, and it is unclear how TPG intends to clear that hurdle.Shenzhen-based Ping An, the country's second-largest insurer by premiums after China Life Insurance Co., is a natural buyer for the stake. Beyond sharing the same hometown, acquiring a bigger stake in Shenzhen Development will help the insurer further branch out into banking. Ping An Chairman Peter Ma envisions turning the insurer into a diversified financial conglomerate by beefing up its banking and asset-management businesses.Ping An's ambitions to expand took a turn for the worse when it made an ill-timed investment in Fortis NV in late 2007 that cost it about $3 billion. It also scrapped a $3.4 billion deal to form an asset-management joint venture with Fortis and fought the Belgian government's attempt to sell the financial-services group to BNP Paribas SA.Following that disastrous investment, Ping An decided to focus its energies on building its domestic franchise. Buying the Shenzhen Development stake would help extend Ping An's banking reach beyond a network it has built through its own Ping An Bank.Ping An is already the second-largest shareholder of Shenzhen Development, with a 4.9% stake as of Dec. 31.Goldman Sachs Group Inc. is advising Ping An on the deal.For Shenzhen Development, the deal's component that involves the sale of new shares will help it raise more capital to meet regulatory standards."The purpose of the fund raising is to raise the bank's capital-adequacy ratio above 10%," said a Shenzhen Development executive.Shenzhen Development's capital-adequacy ratio was 8.5% at the end of March, below the 10% prerequisite for Chinese banks that plan to conduct mergers and acquisitions.Shenzhen Development, one of 17 lenders in China that has a national license, had 282 outlets throughout the country at the end of last year.