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| Why NewBridge International is partner largest equity company in Taiwan. |
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October 24 2007 -Why NewBridge International is partner with the largest private equity investment in company in Taiwan.
– Government finally allows international private equity firms to gain a foothold in the county’s fragmented banking sector.
In what some observers are describing as an atypical investment, Newbridge International is splurging $ 42.5 million on a 22% stake in Taiwan’s tenth-largest listed finance conglomerate by market capitalization, Taishin Financial Holdings. |
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 NEW BRIDGE INTERNATIONAL
Press Release
October 18, 2007
Barcelona, Spain
Why NewBridge International is partner with the largest private equity investment in company in Taiwan.
by Jonathan Schwartz
Read this article online at:
http://www.financeasia.com/article.aspx?CIID=35027
– Government finally allows international private equity firms to gain a foothold in the county’s fragmented banking sector.
In what some observers are describing as an atypical investment, Newbridge International is splurging $ 42.5 million on a 22% stake in Taiwan’s tenth-largest listed finance conglomerate by market capitalization, Taishin Financial Holdings.
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.
“All the positions held by Newbridge will be of the non-executive director variety,” 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 China’s 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, Japan’s 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 Nomura’s 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.”
Some observers conclude that the Taishin investment signals a high level of confidence in the Taiwanese banking sector.
“This investment will not involve a massive restructuring,” notes one specialist. “Newbridge obviously sees huge upside in this deal - upside which can be realized without too much trauma.”
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 Taishin’s 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.
“Taishin is hoping for two things from this deal,” says one specialist. “It wants cash to bolster its capital adequacy levels and it’s looking for a pop in its share price to strengthen its shares as an acquisition currency for the purchase of Chang Hwa Bank.”
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 – at which point the stronger Taishin’s share price, the better.
Indeed, Taishin’s 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.
“This spike has greatly increased the likelihood of Taishin successfully acquiring Chang Hwa Bank in the future,” 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. That’s 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.
“Size matters,” concludes Newbridge managing partner Shan Weijan.
Calculating the impact of the deal on the company’s 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 company’s capital strength by ensuring that capital is not double counted at the holding company and subsidiary level.
At an analysts’ conference call yesterday, management said that the cash infusion will reduce the holding company’s double leverage from 138.5% to 106.8%. However, Rachel Wu, a senior banking analyst at Moody’s in Taipei has a more conservative preliminary estimate.
“We don’t believe in treating earlier instances of hybrid instruments issuance by the company as equity – although we do in the latest case. As a result our estimate is that leverage has gone down from around 150% to around 130%,” she says.
Moody’s believes any leverage exceeding 120% requires ‘close monitoring’, since the higher leverage increases the funding costs of the financial holding company.
Another metric is the FHC’s 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 company’s 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.
Newbridge’s 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.
“Hybrid instruments such as the convertible preferred shares reduce the amount of common stock that has to be issued to the buyers,” says one specialist. “That avoids dilution. The other advantage is that the convertible preferred shares count towards tier one capital.”
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.
“Taishin is basically sound, so the government had no qualms about inviting in private equity groups,” 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.
NEW BRIDGE INTERNATIONAL
Tel: +34.934.815.898
Fax: +34.933.187.186
E-mail: info@newbridgeinternational.com
Newbridge International
Corporate Headquarters
Aribau 221
P.O. Box 173
Barcelona, Spain
08021
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