Chinatrust strikes deal to buy 30% of Nan Shan Life Insurance

Taipei-based financial services group Chinatrust Financial Holding Company has signed a memorandum of understanding with Hong Kong-based China Strategic Holdings to acquire a 30% stake in Taiwanese insurer Nan Shan Life Insurance for $660 million.

The deal comes just weeks after a consortium comprising China Strategic and Primus Financial Holdings bought Nan Shan in a competitive auction in early October. Primus Financial is private equity-backed and was launched earlier this year with the intent of creating a financial services conglomerate in Asia. Former Citibanker Robert Morse is chief executive officer of Primus. Hong Kong-listed China Strategic is the public vehicle through which the consortium is raising part of the financing for the acquisition.

The Primus-led consortium won Nan Shan at a price tag of $2.1 billion so Chinatrust is buying the 30% stake at roughly the same valuation at which the insurer was initially sold.

However, Chinatrust will acquire the stake only after Taiwan's regulator, the Financial Supervisory Commission (FSC), approves the acquisition of Nan Shan by the Primus-led consortium.

Chinatrust has also negotiated an option to increase its stake in Nan Shan after three years "to the extent agreeable by the parties and permissible under the laws", China Strategic said in a Hong Kong stock exchange filing. Chinatrust representatives were reported to have told media in Taiwan yesterday that they are interested in owning at least 50% of Nan Shan.

China Strategic will have the right to nominate the majority of Nan Shan's directors, including the chairman of the board. Chinatrust will nominate the CEO, who will report to the board.

The deal between Chinatrust and China Strategic also includes China Strategic buying a 9.95% stake in Chinatrust for NT$20.8 billion ($648 million). New shares will be issued to China Strategic through a private placement at a price of NT$17.74 per share. The agreed price represents a discount of approximately 12.83% to Chinatrust's market price on November 17.

Chinatrust has shown a keen interest in buying Nan Shan and was rumoured to have been the only party other than winning bidder Primus to put in a bid exceeding $2 billion. Chinatrust's decision to collaborate with its strongest competitor for the insurer could prove to be a winning strategy for both Chinatrust and Primus. It gives Chinatrust a significant interest in an asset that it had keenly pursued, and it provides the Primus-led consortium with a local partner, which should ease the way with Taiwanese regulators.

Morgan Stanley advised AIG on the sale of its interest in Nan Shan, while Deutsche Bank worked on the buy-side with Primus. Sources said neither adviser was involved in the deal between Chinatrust and China Strategic. However, Nomura did secure itself a role, advising Chinatrust.

Moody's said yesterday that the ratings of both Chinatrust Financial Holding Company and the operating company Chinatrust Commercial Bank would be reviewed for a possible downgrade if the Taiwanese firms acquired a significant interest in Nan Shan. The former has an issuer rating of A3, while Chinatrust Bank has a bank financial strength rating of C-, a long-term deposit rating of A2 and a short-term deposit rating of P-1.

Moody's noted that Chinatrust Holding could benefit from diversifying its earnings stream beyond banking into insurance. However "Nan Shan's negative spread problem could more than offset the diversification and synergetic benefits to Chinatrust, particularly in view of the very challenging operating environment for insurers in Taiwan", the ratings agency said.