Itochu, CP to Jointly Invest $10b in Citic Group

JANUARY 20, 2015

Tokyo. Japanese trading house Itochu and Charoen Pokphand Group, or CP, of Thailand said on Tuesday that they plan to jointly invest $10 billion in Citic Group, China’s oldest and biggest conglomerate.

Itochu and CP Group plan to contribute evenly to the investment, taking a joint stake of as much as 20 percent, as both seek to raise their exposure to the world’s second-biggest economy even as it slows from the blistering growth of the past decade.

The deal comes as Citic has been broadening its investor base as part of Chinese President Xi Jinping’s reforms to state-owned enterprises. Citic completed a restructuring in August by injecting about $36 billion worth of assets into a Hong Kong-listed unit.

In December, a person familiar with the matter had told Reuters that Citic Limited was in early talks with companies, including Itochu and CP Group, about a large share placement.

Bold bet

The investment is by far the biggest made by a Japanese company into China on record, according to Thomson Reuters data, beating a $1 billion investment by Nissan Motor into Dongfeng Motor in 2002.

While deals between Chinese and Japanese companies have become more frequent in recent years, Thomson Reuters data show that most have been small. The 55 Japanese acquisitions in China last year were worth a total of around $772 million.

It is also the biggest ever by Itochu, and comes as it is trying to expand its business interests beyond resources, an area where it spent heavily during the global commodities boom through the early 2010s.

Before the Citic deal, Itochu’s biggest investment was a 156.9 billion yen purchase of two units of US vegetable and fruit producer Dole Foods in 2013.

The deal will take place in two stages, with Itochu and CP Group agreeing to buy nearly 2.5 billion shares in Citic for HK$34.4 billion ($4.4 billion) in April this year, and a further 3.3 billion shares for HK$45.9 billion in October.

Some analysts said the investment, which will likely require borrowing from banks, appeared risky for Itochu considering its market capitalization was only slightly over 2 trillion yen.

“From a concentration risk perspective, it appears to be high risk,” said Nomura Securities analyst Yasuhiro Narita.

“While Citic is a conglomerate, it deals with areas such as real estate and raw materials development which are facing deteriorating conditions, we need to note the possibility of future losses,” he added.

For CP Group, a conglomerate controlled by Thailand’s second richest man Dhanin Chearavanont, the deal is the latest in a long series of investments in to China ranging from agriculture and retail to finance.

It was the first multinational to invest in China’s agribusiness in 1979, helping it modernize China’s farm sector.