China Evergrande, the nation’s most indebted developer, faces another potential snag in an attempt to reorganise its sprawling property assets after its partner in Shenzhen called for care and patience in assessing the deal.
Shenzhen Special Economic Zone Real Estate & Properties (Shenzhen SEZ), which is supposed to buy Evergrande’s unit Hengda Real Estate, suggested that it would not rush into an agreement despite four years having passed since the plan was first mooted.
“The business reorganisation involves a state-owned company and the structure of the deal is quite complicated,” the firm said, in an exchange filing on Sunday. “It is an important deal which has no precedent. The plan needs further discussion.”
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The proposal unveiled in October 2016 has been pushed further out six times – by three, six or 12 months – showing the difficulty in agreeing on the terms. The most recent extension was in December 2019, by a full year to the end of 2020.
The four-year lapse has exposed the deal to much speculation. One such episode unfolded last week, when a fake document showed Evergrande had sent out a letter pleading to authorities for speedy approval. The developer has reported it to the local police for defamation.
“China Evergrande has denied the circulated document on Thursday,” Shenzhen SEZ said in the Sunday filing. “The company and every side on the deal has strengthened communication and strived to push forward the reorganisation.”
The deal will require the consent of shareholders and at least five other regulatory authorities, including China’s antitrust agency, according to past exchange filings.
China Evergrande’s shares tumbled 9.5 per cent on Friday to HK$13.78 in Hong Kong, bringing the decline this year to 36 per cent. The Hang Seng Index dropped 17.6 per cent in the same period.
Evergrande has an expansive reach in the onshore property market, owning more than 870 projects in at least 280 cities across all provinces and regions. It recently put 223 properties in 111 cities up for sale with big discounts to lure buyers and enhance its cash flow amid a market slowdown.
Under the plan, Evergrande proposed to sell Hengda to Shenzhen SEZ in exchange for A shares or cash, effectively making it a backdoor listing for the unit. Much has changed since 2016, with the Covid-19 pandemic causing the biggest slump in economic growth since the Cultural Revolution.
Hengda had also projected annual property sales of 450 billion yuan (US$66 billion) to 550 billion yuan for 2017 to 2019. The projected profit was 24.3 billion yuan to 33.7 billion yuan. The parties have not disclosed any new financial terms in their current discussions.
While waiting for the green light, Evergrande has solicited investments from outside investors into Hengda. Over the years, that capital infusion has ballooned to 130 billion yuan, with the repayment hingeing on the outcome of Hengda-Shenzhen SEZ transaction.
“My understanding is that the market didn‘t have high expectations of a completion by January 2021,” said Raymond Cheng, a property analyst at CGS-CIMB Securities.
“We believe that Evergrande already has a backup plan,” he added. “It is likely to renegotiate with investors to extend the terms for another year. They have done this in the past.”
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