Deal of the Year, M&A Deal, Cross-border M&A Deal
Citigroup's $2.7 billion acquisition of Koram Bank from the Carlyle Consortium
Sellside adviser: Goldman Sachs, JPMorgan
Buyside adviser: Citigroup
This is a deal whose significance will grow in the coming years and will be looked back on as a seminal investment for South Korea. The Koram Bank deal can trace its history all the way back to the financial crisis, and what it epitomizes - in a single transaction - is the depth of change Korea has gone through since 1998.
Korea used to be one of the most closed economies in the world and in 1996 it would have been unthinkable that Citigroup would have been able buy the country's fifth biggest bank, especially since the banks were primarily used as tools to promote the government's industrial policy.
Today the banking sector is a wholly different beast. Divorced from government policy and now much more focused on the business of banking, the Korean banking sector has come a long way. But as the debacle with credit cards shows, there is still some way to go before the Korean banks lay claim to global best practice. This is where Citigroup's entry is so important.
The arrival of the world's biggest bank - with its vast array of products, innovative solutions and risk management skills - is just the competitive catalyst required to drive Korea's big four banks (Kookmin, Shinhan, Hana and Woori) to the next level of their development. The government, the regulators and investors all agree that Citi's acquisition of Koram was the best possible thing that could have happened in Korean banking.
The deal becomes even more transformational when you consider it has forced HSBC to consider its own next move in Korea (ie acquisition). This could lead to a big six in Korean banking where two of those banks (Citi, HSBC) are also the world's two biggest and most international banks. There are not many other banking markets in the world where the same is true.
From Citi's perspective, Koram could prove one of its savviest acquisitions. The goal is to make $1 billion a year in net income from Korea. And given this was Citi's first major acquisition in Asia, the significance of the deal also has ramifications for Citi's acquisition strategy in the rest of the region. It is clear that Citi is no longer following an Asian strategy of organic growth and cherry-picking clients. It now has a strategy to grow in Asia through the right local bank acquisitions.
From the technical aspect, this was also a great M&A deal. It contained all the drama of an M&A bidding situation, with both Standard Chartered and Temasek bidding versus Citi. Adding to the mix was the fact that Citi made the deal conditional on gaining full control, meaning there was a highly dramatic tender offer.
What was clear was that all the bidders recognized that Koram was a good bank. The reason? The Carlyle consortium had bought Koram in October 2000 and had set out with a mission to make it Korea's cleanest and best run bank. Ironically, to do this it hired a whole slew of people out of Citigroup in Korea, including YK Ha who became Koram's boss. Thus when Citi was bidding for this asset it also knew it had been run by an ex-Citibank management team along exactly the same lines as Citi would have run the bank had it been in charge. Citi now has the fifth biggest banking presence in Korea, with 230 branches, 5,300 SME customers, six million retail banking customers and 3.3 million credit cards.
Carlyle and JPMorgan Corsair originally paid $450 million for their controlling 40.5% stake in Koram and made themselves and minority investors a healthy return in the ensuing period. This was the first meaningful private equity exit in Korea since the crisis and the Carlyle consortium was well rewarded for its efforts making an IRR of 28% and analysts speculate it netted profits of close to $1 billion.
This was a deal that has resounding consequences on many levels, and one of those is its validation of the role private equity - when done properly - can have in Asia. To read a blow by blow account of the deal from inception in 1999 to conclusion (as featured in our FinanceAsia magazine July cover story) click here.
Best Domestic M&A Deal
Three-way $709 million merger between Thai Military Bank, DBS Thai Danu and IFCT
Advisors: Citigroup, JPMorgan, and Morgan Stanley
Three way mergers are pretty rare, especially in non-crisis environments. Moreover, this was the first banking merger in Thailand of significant scale. Thai Military Bank's acquisition of DBS Thai Danu and IFCT creates the fifth largest bank in Thailand with $17 billion in assets.
Thai Danu had been a troubled asset for DBS ever since its acquisition after the financial crisis and was recognized by DBS management to be sub-scale. DBS therefore decided to do the sensible thing. This pragmatic deal allowed DBS to free up $500 million of regulatory capital and retain an 18% stake in the newly combined entity.
The deal was originally supposed to be a two-way merger between Thai Military and Thai Danu, but the government was just finalizing its new masterplan for the financial sector and suggested adding IFCT too. IFCT is an industrial development bank - one of a very short list of functioning industrial development banks left in the region.
The new bank gains three definite skillsets from the merger. TMB brings a very broad branch distribution platform, loyal customer base and proven excellence in branch management. IFCT brings strong corporate relationships and project finance expertise. DBS - through a special service agreement - brings strong technical expertise in the treasury area and will look after risk management.
The deal creates a strong competitor in the Thai financial sector and gives DBS a much bigger platform through which to push its products.
This was a groundbreaking transaction in Thailand - traditionally one of the quietest M&A markets in the region - both in terms of its three-way nature, and the number of stakeholders involved.
Best Equity Deal, Best IPO, Best Privatization
Thai Oil $788 million IPO
Bualuang Securities, Finansa, JPMorgan, Merrill Lynch, Morgan Stanley, Phatra Securities, SCB Securities
Literally, right up till the last minute we were debating the merits of Thai Oil's IPO and privatization with that of Hong Kong's Link Reit. We came down in favour of Thai Oil in part because it was actually listed, and at the time of our final decision-making it was not 100% certain the Link Reit would actually get listed. The Link deal became mired in controversy and petty politics, and via a skilled use of the Hong Kong court system (and the potential to appeal) the global coordinators were forced to delay the listing date to the week leading into Christmas.
We also think Thai Oil fulfils the spirit of a privatization in the true sense of the word - taking a company from the public to private sector with a view to making it more efficient and serving consumers better. Indeed, it is possible to argue that consumers of Link Reit's assets are the biggest losers of its IPO process, since rental rates and prices in the shops under its jurisdiction will go up not down.
As a privatization exercise Thai Oil was far more effective. It was also a superb IPO that was well structured and incredibly fortuitously timed to take advantage of strong oil prices in the early autumn.
The IPO fits in well with two very dominant themes this year.
From a global perspective it highlights the huge impact oil prices have had on financial markets. From a regional perspective, it also shows just how far corporate Asia has been able to transform its fortunes since the financial crisis.
Thai Oil was Thailand's largest ever bankruptcy - crumbling under $2.275 billion of largely foreign currency debt that had been borrowed to finance an ambitious capex plan just as the refining sector was entering a cyclical downturn. Now it ranks as the largest ever IPO from Thailand and the largest from South East Asia since 2002.
It was a huge success, generating an order book of $10.6 billion, which represented 28 days trading volume on the Thai market and 16.5% of the exchange's market capitalization.
Since listing at Bt32 per share, the stock has performed well for investors rising to Bt43.5 in the space of two months. It also revived the fortunes of the entire SET, which had been Asia's worst performer over the first 10 months of the year. Indeed, its own parent PTT rose 20% over the course of the marketing period as Thai Oil took its message to investors.
Privatization and an IPO have freed Thai Oil to focus on its core business. Earlier this year, it was still involved in a final debt hair cut that reduced debt to $830 million.
It was also bedeviled by a complicated shareholding structure heavily biased towards creditor shareholders that had taken equity in the re-structuring. The IPO removed this by unwinding the creditors' interest in a Mauritius SPV that held a 37.18% equity stake in the company. In turn the SET allowed existing shareholders to re-subscribe to a company's IPO for the first time.
Thai Oil was also able to raise some new cash from the IPO, which it used to re-acquire affiliates. Previously its restructuring had forced it to dilute its stakes in Thai Paraxylene and Thai Lube Base.
But in the end it came down to oil prices. In 2001 at the nadir of the last cycle, Thai Oil was recording a refining margin of just $1 per barrel of oil. By the third quarter of 2004, the margin had soared past $10.
Best Secondary Offering
Khazanah's $766 million sale in Telekom Malaysia
AmMerchant, CIMB, Credit Suisse First Boston, ECM Libra
There were many, many candidates for this award as 2004 has been the year of the secondary offering rather than the IPO. Telekom Malaysia was one of a number of large, well-executed transactions. But we judged it the best because it was a great deal with far wider significance.
The deal ranks as the largest ever secondary offering from Malaysia, but its true significance lied in the policy shift it signaled from the Badawi government. The new prime minister had previously said he wanted to develop closer links with Singapore, boost liquidity on the Kuala Lumpur Stock Exchange and improve the productivity and accountability of major government-linked companies like Telekom.
The divestment by the government's investment arm, Khazanah embraced all three and marked the first direct investment that Singapore's government investment arm, Temasek, had ever been allowed to make in Malaysia. It was a very public and symbolic embracing of an old foe that generated acres of news coverage.
Temasek purchased half of the offering, gaining a strategic 5% stake in Malaysia's second largest listed company. Nevertheless while the deal was not that large by the standards of North Asian markets, it was very large for Malaysia, highlighting the challenges the government has faced as it attempts to broaden the market's scope. As such it represented 68 days trading in Telekom shares on a one-month basis or a far more staggering 123.6 days trading on a six-month basis.
The prospect that Khazanah might adopt an ambitious divestment programme had already helped propel liquidity and valuations on the exchange. At the end of December, for example, Telekom had been trading around the M$8 level. The divestment was priced at a relatively slim 1.5% discount to the stock's close of M$9.85 on March 1. At the end of the year, it has risen further, trading around the M$11.60 level in mid-December.
Most Innovative Deal
Shinhan Financial $538 million block trade
Morgan Stanley
Market participants are likely to remember 2004 as the year when ADRs and GDRs lost their powerful hold over secondary market issuance and domestic Asian markets became far more receptive to accelerated block trades.
Shinhan was truly innovative and a trailblazer for similarly structured deals out of India and Thailand as well as Korea where Hana, Woori, Hyundai Motor and KT&G all followed its lead over the course of the year.
Prior to Shinhan, domestic placements out of Korea had been small and very few and far between because of the country's onerous rules on pricing discounts and crossing shares. Where the first point is concerned, accelerated blocks cannot be sold at a discount greater than 7% to the spot close of the stock in question.
Shinhan's whole trade also needed to be crossed from the seller (Shinhan) via the agent (Morgan Stanley) to the 80 strong order book within a 50 minute window before the stock started trading the next day. If Morgan Stanley had been unable to cross the entire amount before the market re-opened, it would have left itself dangerously exposed to outside investors hitting its bid and leaving it short of paper to allocate to investors.
In Hong Kong, where placements are commonplace, none of these restrictions apply. There is no cap on the discount at which shares can be crossed and they only have to be crossed between the issuer and investment bank before the stock resumes trading. They are then legally crossed with investors over a more leisurely two-day window.
When market conditions were weaker the 7% discount rule always put a lot of banks off underwriting trades in Korea because they feared there would not be enough leeway to clear a trade through the market.
And while international equity issues from Korea have often been priced at extremely tight discounts to spot, investors have equally had time to short the shares down first. In this case, the book was only open for one hour after Korea's close.
Shinhan was also keen to get a deal out to market quickly because it was up against a deadline to dispose of its Treasury shares. After a one-hour bookbuild at a fixed discount of 2.78%, the deal closed two times oversubscribed.
For Shinhan, the accelerated block represented a quick and clean divestment process. It did not have to undergo the formality of a DR listing process, it did not have to complete as much documentation and there was less danger of its share price tumbling.
Best Equity-Linked Deal
Temasek/Singapore Telecommunications $1.37 billion Exchangeable Bond
Merrill Lynch
Over the past few years it has become increasingly difficult to select any stand-out equity-linked transactions because deals have so often been compromised by the overly aggressive terms banks have been prepared to pitch in order to win business.
Singapore has been a case in point and during 2003 Singapore government-related entities received continual criticism for their handling of deals. A succession of transactions were mandated on the basis of competitive bid, in the process attracting ludicrously aggressive terms and rapidly unraveling. Many wondered how the government thought it could sustain a divestment programme if it continued to pay no heed to aftermarket performance and investor loyalty.
Things started to change at the beginning of 2004 and Temasek entered the year on a very positive footing with this deal during the very first week of January. Its success heralded a spectacular year for the government investment arm as it roamed across Asia sweeping up assets in its wake.
In mandating a combined equity and equity-linked deal in SingTel shares, Temasek did take competing bids from investment banks, but was flexible enough to modify terms to suit the order book lead manager Merrill Lynch was able to generate. It had certain size and blended pricing aspirations in mind and the lead was able to deliver them.
This transaction deserves its award because it fulfils all the criteria of a successful equity-linked deal for one of Asia's most demanding issuers. It was sizeable and it had a pricey valuation for a stock that was trading at a 52 week high. Nevertheless, it was turned around at considerable speed and traded up in the aftermarket.
All market participants concurred that a decision to split the deal between 30% equity and 70% exchangeable achieved the right balance. In terms of structure, the combination of Temasek's triple-A credit, a defensive two-year deal, plenty of available stock borrow and a rock solid bond floor proved a winning combination.
The exchangeable went on to close its first day trading just above par at 100.125% to 100.375%. The stock price fell to close at its placement price, but given the potential impact delta hedging could have had, this was a good result.
So too, Temasek achieved its strategic objectives. The 5.61% combined divestment meant it was able to further reduce the huge overhang in SingTel in which it still owns a 61. 49% stake on full conversion of the exchangeable. It also pushed the stock into the MSCI bucket, generating additional liquidity.
Best Mid-Cap Equity Deal
Mengniu Dairy $197 million IPO
BNP Paribas Peregrine, Morgan Stanley
Mengniu Dairy was a very obvious choice for this award. It is rare to find rival investment banks willing to congratulate a lead manager for completing one of the most successful deals of the year. But such has been the case with this company.
The Mongolian milk producer perfectly fits one of the overriding themes of the year: domestic consumption stories. It is the concept Asian investors have been most willing to buy into particularly in China. It is also the reason why order books for the deal closed significantly oversubscribed: 15 times on the institutional side and 203 times on the retail side, prompting full clawbacks.
Mengniu's success gave the Hong Kong IPO market a real boost at a time when it really needed it. From late spring, fears about a hard landing in China had undermined confidence on the Hong Kong Stock Exchange and led to a string of difficult deals.
But the leads were able to build a textbook perfect, momentum driven deal for Mengniu when it listed in early June. Having initially gone out with a wide and fairly generous valuation, they were able to lift the price range midway through roadshows by leveraging Asian demand. International accounts that had started off showing price sensitivity changed their minds once they saw the huge momentum the deal was building and at the end of the process the leads reported virtually no price limits in the entire institutional book.
On pricing at HK$3.925 per share and a P/E ratio of 19 times 2005 earnings, many observers thought the valuation full. However, the deal has gone on to trade spectacularly well in the secondary market, climbing to HK$6.05 by mid December.
Best Small-Cap Equity Deal
Biocon Rs3.15 billion ($71 million) IPO
DSP Merrill Lynch, HSBC, Kotak Investment Bank
Biocon is a hot company, and it was thus no surprise that the Indian biotech company's IPO saw strong demand. The retail tranche was 14 times subscribed and the institutional tranche 39 times subscribed.
This is a 25-year old company - ie not a flash in the pan - but one, which has impressed investors with its intellectual property and fermentation-based processes. It is an integrated bio-pharmaceutical company that has put in place the building blocks of drug discovery and clinical research. It has targeted a $30.5 billion market that is based on its competencies in enzymes to cardiovascular, anti-diabetics, immunosuppressants and oncology products.
The deal came to market in March during choppy times and launched its IPO initially at a discount of 20% to Ranbaxy Laboratories, but on pricing saw that discount narrow to 17%.
The deal sought to create momentum by educating investors on what remains a badly misunderstood industry. During roadshows the lead managers took pains to address key concerns about Biocon and establish the key investment themes in the global biotech sector.
It is a testament to these efforts that the book was covered within seven minutes of the deal opening. It received a total of institutional demand of $1.61 billion, with $460 million of that demand coming from the US.
COUNTRY DEAL AWARDS
Best China Deal
HSBC's $1.75 billion 19.9% investment in Bank of Communications
Advisors: Goldman Sachs, HSBC
In August HSBC gave further proof of its strong commitment to the China market. It paid $1.75 billion in cash to buy a 19.9% stake in China's fifth largest bank, Bank of Communications.
Following the same roadmap as its similar deal with Ping An, Bank of Communications plans to list, and HSBC is now easily the largest foreign investor in China's financial services sector. It has taken a portfolio approach to picking up assets in China and with this deal has bought into a franchise that will offer it ample opportunities to cross-sell its products, such as credit cards (in a special JV).
Bank of Communications has $115 billion in assets, 30 million customers and a 3% market share in China. It has over 2,700 branches in 130 cities. HSBC felt comfortable buying into the bank after it went through a complete restructuring, and an NPL carve out and paid 1.4 times post-money book value.
Best Hong Kong Deal
Hong Kong Link HK$6 billion toll road securitizationHSBC, Citigroup
The sheer scale and ambition of Hong Kong's toll road securitization make it impossible to ignore for this award. The HK$6 billion ($770 million) deal was Asia's first ever publicly offered securitization and, as such, it came with all the razzmatazz of a blockbuster Hong Kong IPO: billboard ads, television commercials, a website. It even had its own logo. Indeed, securitization has never had so much attention. By raising awareness among potential investors and originators across the region, the Hong Kong Link 2004 deal has without doubt played a significant role in advancing the industry.
Best India Deal
Tata Consultancy Services $1.17 billion IPO
DSP Merrill Lynch, JPMorgan, JM Morgan Stanley
Bankers and investors alike had been waiting years for the Tata group to spin off this huge software services business. When finally it relented, it was always going to be a strong contender to bring one of the region's top IPO's of the year.
Such big deals are also like gold dust in India and demand was strong topping $10 billion. The deal was well positioned in the face of a difficult global market for the tech sector and as expected came at a slim discount to Infosys and premium to Wipro. Since then it has traded through both and bankers and investors now await a potential listing on the New York Stock Exchange.
Best Indonesia Deal
Astra and Standard Chartered's acquisition of Bank Permata
Advisers to the acquirers, NM Rothschild & Sons, UBS
Advisor to the government ABN AMRO
This deal was easily the best-run bank sale process from Indonesia and almost brings to an end the saga of re-privatizing the banks nationalized by the government in 1998-2000. The government got a good price and the winners got a rare but strategic asset. Everyone wins.
Best Korea Deal
Citigroup's $2.7 billion acquisition of Koram
Advisors: Citigroup, Goldman Sachs, JPMorgan
Our deal of the year. A transformational deal for Korea that validates the potentially beneficial role of private equity in Asia and will change the landscape in Korean banking over the next five years in profound ways.
Best Malaysia Deal
Khazanah's divestment of a $766 million block in Telekom Malaysia
AmMerchant, CIMB, Credit Suisse First Boston, ECM Libra
The largest secondary offering ever from Malaysia and heralding the start of what is expected to be an ambitious divestment programme by the Malaysian state-owned investment arm. A highly successful deal that had symbolic importance as the one which embraced strategic investors from Singapore.
Best Philippines Deal
ABS-CBN Broadcasting $120 million term loan
Arrangers: ABN AMRO, BPI Capital, ING, SocGen
This was the first time a Lopez group company had been able to access the syndicated term loan market for quite some time. ABS-CBN is the leading broadcaster in the Philippines and had a pressing need to refinance debt. This five year loan was specially structured to make sure funds could not be on-lent to other parts of the Lopez group and when banks saw the quality of the structuring, the deal became oversubscribed, with 12 banks joining. The loan was structured as a multi-currency facility to allow the participation of local and foreign banks, and included currency and interest rate hedging to minimize risks to the borrower, which has no US dollar revenues.
Best Singapore Deal
Singapore Power's $3.7 billion acquisition of TXU Australia
Advisors: Credit Suisse First Boston, Morgan Stanley
TXU Corp managed to sell its Australian power assets to Singapore Power in a mere 18 days during a heated bidding process. The deal was highly strategic for Singapore Power and creates the largest utility in Australia. SingPower was able to get over regulatory hurdles to put together its Victoria transmission grid with TXU's 80,000 square kilometer of electricity and gas distribution networks, 1.1 million retail customers, and 1290MW gas-fired Torrens Island Power Station. It forms part of the ongoing trend of Singapore Inc buying assets abroad.
Best Taiwan Deal
Cathay Financial Holdings $495 million secondary offering
JPMorgan
Capital markets activity from Taiwan has been very limited in 2004. The tech sector has been on a downward slide for much of the year and activity has been muted in the FIG sector with a lack of further M&A driven consolidation. Towards the end of the year, however, the market started to re-awaken and Cathay timed the disposal of its remaining treasury shares to perfection. It caught a wave of buying activity ahead of an MSCI re-balancing and at a time when a number of analysts thought its share price was peaking.
The lead manager also did a very good job for what has long been a house client. It aggressively underwrote the transaction and pushed it out ahead of a competing deal for Fubon that was also waiting in the wings.
Best Thailand Deal
Thai Oil $788 million IPO
Bualuang Securities, Finansa, JPMorgan, Merrill Lynch, Morgan Stanley, Phatra, SCB Securities
The largest and one of the most successful IPO's ever from Thailand. Perfectly timed to take advantage of soaring crude oil prices.
