US embassy cable - 05TAIPEI3287

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003287 
 
SIPDIS 
 
DEPT PASS TO AIT/W AND USTR 
DEPT FOR EAP/TC, EAP/EP AND EB/IFD/OIA 
TREASURY FOR OASIA ZELIKOW,WISNER AND OCC AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS, 
SAN FRANCISO FRB AND NEW YORK FRB 
 
E.O. 12958: DECL: 07/08/2020 
TAGS: ECON, EFIN, PINR, PREL, TW, Foreign Policy, Finance 
SUBJECT: RENEWED HOPE FOR TAIWAN BANK CONSOLIDATION 
 
REF: A. TAIPEI 2984 
     B. 04 TAIPEI 04050 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D 
 
1.  (C) Summary: On July 22 Taishin Financial Holding Company 
(Taishin) won a 22.5% of equity in the state-owned Changhwa 
Commercial Bank (CCB) with a bid price 46% higher than the 
floor price set by CCB and twice the value foreign investors 
had assigned to CCB shares in May of this year (ref A).  The 
high acquisition cost prompted investors to dump 88 million 
Taishin shares and drove down Taishin share price by 4% on 
the first trading day after the July 22 bidding.  Top Taishin 
executives have since argued the logic of their acquisition 
to the public and separately to AIT, but outside analysts 
still describe the bid as "very rich."  Although Taishin 
shares remain slightly down, the deal has spurred interest in 
other bank acquisitions.  End summary. 
 
High Bid Surprised Even Bid Organizers 
-------------------------------------- 
 
2.  (C) On July 22, 2005, Taishin surprised its rivals, local 
market observers, and government officials by winning a bid 
for 22.5% equity in new stocks issued by CCB, one of the 
large state-owned banks in Taiwan.  Taishin offered NT$26.12 
per share, 46% higher than the floor price of NT$17.98 set by 
CCB.  The price of NT$26.12 was NT$2-3 above an offer by 
Temasek Holdings (a Singapore Government-controlled 
investment company) that Taiwan's Ministry of Finance (MOF) 
considered most likely to win.  The bid price of NT$26.12 per 
share far exceeded the NT$10-14 offered by foreign portfolio 
investors in an aborted plan to issue global depository 
receipts in May 2005.  On August 1, the Taishin-CCB deal was 
finalized in a formal signing ceremony. 
 
Taishin Has Its Reasons 
----------------------- 
 
3.  (C) Taishin Holdings Taiwan Securities Company President 
Lin Keh-Hsiao explained the reasoning behind the surprise 
acquisition to AIT on August 3.  According to Lin, after the 
failed sale of CCB in June, MOF was under pressure to find a 
way to fulfill the goals announced by President Chen of 
selling one of Taiwan's state-owned banks to a foreign 
investor and reducing the number of state-owned banks by half 
by the end of 2005. 
 
4.  (C) Lin told AIT that MOF held discussions with Temasek 
prior to the July bidding in order to ensure the sale went 
smoothly, and MOF even modified the bidding rules to allow 
Temasek, an investment company rather than a financial 
holding company (FHC), to participate.  Temasek, which has 
been aggressively expanding its operations in East Asia over 
the past year, persuaded MOF to sweeten the deal by adding 
guarantees to the dividend payments and control over the CCB 
board of directors. 
 
5.  (C) Lin said that like most other financial experts he 
had dismissed the second attempt to sell CCB as little better 
than the first.  The due diligence conducted during the 
failed June sale had revealed non-performing loans (NPL) that 
made the book value of CCB shares only NT$6-8 per share, 
while lowest acceptable bid price was NT17.98 per share. 
However, Lin said that Taishin Holdings Chairman Thomas Wu 
(Tung-liang) took a boldly different way of interpreting what 
was being offered. 
 
6.  (C) Lin explained that the deal gave Taishan &special8 
preferred stocks.  Normally, preferred stocks give three 
privileges: 1) priority in dividends (the CCB preferred 
stocks carry a guaranteed dividend of 1.8% of the par value); 
2) convertibility to common stocks (the CCB preferred shares 
will automatically convert to common stocks after three 
years); 3) protection of retained earnings, dividends to 
preferred stockholders foregone in one year should be paid in 
subsequent years. 
 
7.  (C) Moreover, at Temasek,s urging, the MOF had agreed to 
grant the bid winner the following three additional 
advantages: 1) the right to vote and be voted as board 
directors (MOF also promised to vote its 17.5 % equity shares 
with the winner, effectively giving the winner control of the 
CCB board of directors); 2) the preferred stock will have the 
par value of the winning bid (NT26.12 per share) instead of a 
par value based on the book or market value of the shares; 3) 
The bid winner has priority over common stock holders to 
receive liquidated assets. 
 
8.  (C) Lin told AIT that Taishin Chairman Wu believed that 
with these guarantees, in a worst case scenario where the 
merger failed and CCB continued to lose money, the total 
acquisition price of NT35.6 billion could be viewed as a 
capital injection into CCB that paid 1.8% interest.  The 
guarantees meant that the capital injection would be treated 
as a debt in case of CCB liquidation, and almost certainly 
would be paid back.  Taishin Chairman believed this third 
"special" preference was the most important, and made the 
high bid a low-risk move. 
 
9.  (C) In addition, according to Lin, Chairman Wu reasoned 
that the worst case was very unlikely to happen.  The winning 
bidder would have control over the board of directors and 
could certainly arrange for a merger on acceptable terms. 
President Lin told AIT that Taishin is confident that it can 
increase efficiency and profitability at CCB, which in turn 
will push up the stock price from the current level of NT$14 
per share to over NT$26 before the end of three years (when 
the preferential stock converts to common stock).  MOF has 
agreed to sell its shares to Taishin, and should Taiwan's 
legislature object, the MOF has agreed it would not allow the 
shares to go to any other single investor, or be sold in a 
block, thus providing reasonable assurance that Taishin will 
keep control of the CCB board of directors. 
 
10.  (U) When Taishin International Bank, a subsidiary of 
Taishin FHC, and CCB merge together, the new bank will be the 
second largest with a combined asset of NT$2.1 trillion.  The 
new bank will account for a market share nearly 9% in terms 
of assets and operate the largest banking network, with 270 
branches on the island. 
 
Book Value of CCB Not Worth Bid Price 
------------------------------------- 
 
11.  (C) BNP Paribas Taiwan Corporate Finance Head Peter Kurz 
told AIT that the value of CCB did not justify the Taishin 
bid price.  He estimated that the bid was about 2.5 times 
CCB's "clear book value" (i.e., net worth).  Kurz said 
Taishin was paying a greater premium than was paid in other 
recent bank acquisitions (which he thought were also valuated 
too high).  He noted, however, that the bid price might be 
justified on a strategic basis when the fit between Taishin's 
strengths in consumer products and CCB's branch locations was 
taken into account.  Taishin Securities Lin revealed to AIT 
that Taishin Chairman Wu had expected Fubon Holdings to also 
notice the sweeteners added to the deal and so Taishin bid 
high in order to shut out Fubon.  However, it turned out that 
Fubon did not submit a bid. 
 
12.  (C) Comment: Prior to the actual July 22 bidding, 
Temasek was the favored bidder because Taiwan authorities 
wanted to sell CCB to a foreign investor.  MOF accepted 
Temasek,s requests for special privileges to make sure the 
deal was a success.  Taishin was apparently the only bidder 
that recognized the implications of these privileges. 
However, the success of the deal, and the high bid price, has 
had a dam-breaking effect on Taiwan bank consolidation. 
Several FHCs did not want to be the first to buy a 
state-owned bank, but also do not want to be left out as 
Taiwan authorities push further consolidation.  AIT has 
learned that several other bank merger talks have taken on 
new impetus, and may be finalized in coming weeks. 
State-owned banks will be major targets because they are 
large enough to quickly expand the operational scale as well 
as the market share of a bid winner.  End Comment. 
PAAL