Bank of America's stake in China Construction Bank may play well
U.S. politicians could be forgiven a raised eyebrow or two. Bank of America took $15 billion under the U.S. Treasury's Troubled Asset Relief Program, known as TARP. Now its chief, Ken Lewis, is spending $7 billion of his spare cash upping the bank's stake in China Construction Bank, or CCB, to 19 percent. It might smack of TARP funds - borrowed by the United States from countries like China - going full circle back to the Middle Kingdom.
But at least Bank of America's latest CCB investment looks in the money, for now. Bank of America is paying a substantial discount - just 2.80 Hong Kong dollars, or 36 cents, a share, according to The Wall Street Journal - to the Chinese lender's 4.11 dollar closing price Monday.
While Bank of America is locked into its new investment until 2011, it has an immediate paper gain of more than $3 billion. The question is why Lewis has to pounce now. Sure, he sees strategic value in a closer relationship with CCB. But with the United States on the brink of recession, one might expect the chief of one of the largest consumer banks in America to sit on any spare cash - especially after acquiring Countrywide and Merrill Lynch this year.
But Lewis does have some flexibility if Bank of America's fortunes take a turn for the worse. He could sell some of the shares in the original 9 percent stake the bank bought for $3 billion when China Construction went public in 2005.
There's still the pesky matter of TARP. The idea that borrowed U.S. government cash is being sent back to one of its biggest creditors is ironic at best, and could raise political hackles. Bank of America, which tapped private investors for $10 billion before getting a government injection, says it hasn't used TARP money for the purchase.
Still, all the bank's cash is ultimately in the same pot, and this particular $7 billion won't be used to get credit markets moving in the United States, as TARP was intended to do. At the very least, Lewis could claim that the deal more than covers the cost to taxpayers, should critics insist TARP cash is being used: Bank of America should collect annual dividends on its new investment from CCB worth some 7 percent of what it is paying. The Treasury is charging Bank of America 5 percent on its preferred stock investment, in turn more than the government's cost of funds. But if Countrywide, Merrill or the faltering U.S. economy puts Bank of America in a bind, that might be cold comfort. - Richard Beales and Antony Currie
A BAD DEAL FOR 2 PARTIES
The French government has managed to stiff the shareholders of not one but two companies by engineering the sale of a 21 percent stake in Thales, the defense electronics group, to Dassault Aviation, the maker of fighter planes.
The seller, the French-American telecommunications company Alcatel-Lucent, doesn't get the price it could have extracted from another interested buyer. And Thales shareholders must contend with a low valuation for their company. Worse, they will be robbed of a full bid.
Alcatel-Lucent's stake in Thales is not strategic and has been informally on the block for the past two years. The only seriously interested party, the aeronautics and defense group European Aeronautic Defense & Space, was rebuffed two years ago because of strong opposition of Thales management and internecine feuds between EADS's German and French shareholders.
Alcatel got serious again about selling last summer. EADS, again, said it was interested, and reportedly offered €44 a share for the stake - a total of €1.8 billion, or $2.3 billion.
The French government opposed the deal, on fears that Thales would fall prey to the same type of French-German infighting as EADS. It then turned to Dassault, even though that company's chairman went on record a few months ago to say he wasn't interested in Thales - rightly so, as a combination offers few synergies.
But it appears some offers, especially those made by President Nicolas Sarkozy, cannot be refused. So Dassault will now buy the stake for €38 a share. This is a 20 percent-odd premium to the stock price last week, but it's still 13 percent less than EADS offered.
Outside shareholders should at least have the right to tender their shares for €38 to either the French government or Dassault. But the chances are slim, and markets are resigned: tellingly, Thales shares declined on news of the deal. - Pierre Briançon