Newbridge can easily afford the stake given it made $3.3 billion from the sale of its 51% stake in Korea First Bank (KEB) to Standard Chartered in January 2005. However, unlike KEB, it will not gain management control this time round.
According to one specialist, the US private equity group have will have just two out of nine board seats at the financial holding company level and one of five seats at the bank level. Moreover, it will not have its own staff in key positions such as chief credit officer or CFO.
ôAll the positions held by Newbridge will be of the non-executive director variety,ö says the specialist.
The deal is the largest ever investment in a Taiwanese financial institution by a foreign investor. Two years ago, Newbridge bought just 18% in ChinaÆs Shenzhen Development Bank, but managed to capture effective management control. That deal was tiny in comparison, involving a consideration of just $150 million.
Alongside Newbridge, JapanÆs biggest brokerage, Nomura Group, is also taking an additional 3.38% stake for $125 million, raising the total consideration to $969 million. Specialists say that NomuraÆs stake is partly symbolic since the Japanese player likes to take small stakes in key partners. But they add that it is interested in ultimately breaching the mainland Chinese domestic securities market in tandem with a Taiwanese partner.ö
Some observers conclude that the Taishin investment signals a high level of confidence in the Taiwanese banking sector.
ôThis investment will not involve a massive restructuring,ö notes one specialist. ôNewbridge obviously sees huge upside in this deal - upside which can be realized without too much trauma.ö
Ultimate control will likely remain with the Wu family. Gauging the exact shareholding levels of Taiwanese FHCs is often difficult because Taiwanese families frequently retain control through proxies and indirect stakes. They usually have stakes of 20-50%.
From TaishinÆs point of view, the deal brings a welcome infusion of capital and the chance of boosting its share price. The bank was sole advised by Citigroup.
ôTaishin is hoping for two things from this deal,ö says one specialist. ôIt wants cash to bolster its capital adequacy levels and itÆs looking for a pop in its share price to strengthen its shares as an acquisition currency for the purchase of Chang Hwa Bank.ö
So far Taishin has spent NT$36 billion ($1.1 billion) on a 22% in Chang Hwa. That is pure cash. However, observers believe the two players could ultimately merge via a share swap û at which point the stronger TaishinÆs share price, the better.
Indeed, TaishinÆs share price has been under severe pressure. Having hit a high of over NT$26 in March last year, it had slid to NT$16.4 by November following news of the Chang Hwa purchase last July.
It was also hard by problems in the credit card sector where defaults have been rising.
Since then it has performed well. Year-to-date it is up 22.09% and rose by the full 7% permitted by the local stock exchange as the deal was announced on January 29.
ôThis spike has greatly increased the likelihood of Taishin successfully acquiring Chang Hwa Bank in the future,ö comments one analyst.
Should Taishin acquire Chang Hwa it will put it within striking distance of a 10% market share in both the deposit and loan market. ThatÆs considered an important milestone in a market as overbanked as Taiwan. Analysts believe the merged entity would become the second biggest banking group by assets on the island.
ôSize matters,ö concludes Newbridge managing partner Shan Weijan.
Calculating the impact of the deal on the companyÆs capital base is complicated by its FHC structure. Two metrics are commonly used in Taiwan.
The first is double leverage. This figure is meant to give an overall picture of the holding companyÆs capital strength by ensuring that capital is not double counted at the holding company and subsidiary level.
At an analystsÆ conference call yesterday, management said that the cash infusion will reduce the holding companyÆs double leverage from 138.5% to 106.8%. However, Rachel Wu, a senior banking analyst at MoodyÆs in Taipei has a more conservative preliminary estimate.
ôWe donÆt believe in treating earlier instances of hybrid instruments issuance by the company as equity û although we do in the latest case. As a result our estimate is that leverage has gone down from around 150% to around 130%,ö she says.
MoodyÆs believes any leverage exceeding 120% requires æclose monitoringÆ, since the higher leverage increases the funding costs of the financial holding company.
Another metric is the FHCÆs capital adequacy ratio, which according to one specialist comes in at 92.5% pre- and 111.3% post the Newbridge and Nomura transactions. Unlike the double leverage figure, the higher the CAR figure, the better the companyÆs capitalization.
The deal was carefully structured to postpone dilution of existing shareholders as long as possible, while helping the company bolster its capital levels with immediate effect.
NewbridgeÆs NT$27 billion cash infusion was effected in three ways - via the acquisition of 444 million common shares worth NT$8 million, via 666.6 million perpetual convertible preferred shares (convertible to ordinary shares after three years, but only redeemable in ten) worth NT$12 billion and via an NT$7 billion convertible bond with a three year lock up and a conversion price of NT$19.8. This represents a 10% to the purchase price of the common shares.
ôHybrid instruments such as the convertible preferred shares reduce the amount of common stock that has to be issued to the buyers,ö says one specialist. ôThat avoids dilution. The other advantage is that the convertible preferred shares count towards tier one capital.ö
The sale was based on the auction method, following a trawl around 14 financial institutions last November by financial advisor Citigroup. None of the players approached were major foreign commercial banks.
ôTaishin is basically sound, so the government had no qualms about inviting in private equity groups,ö concludes one specialist.
Others say this is somewhat ironic given that numerous private equity investors had been keen on purchasing Chang Hwa in the run up to its sale last summer At the time, the government is said to have wanted the bank sold to a foreign commercial bank.
Some interpret its change of heart to desperation in wanting to accelerate the consolidation process in a country where there are still 50 odd banks.
The Newbridge acquisition is scheduled to be finalized next month.
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