Deal volume may have been down in Asia in 2001, but the level of daring wasn’t. In CFO Asia’s second annual ranking of corporate finance deals, we’ve chosen ten transactions that not only braved tough market and regulatory environments, but displayed skillful structuring, smart pricing and sheer determination. Some of these deals were controversial. And not all of them pleased investors. But each, in its own way, made a little history.
1. DBS’s $5.9 billion Acquisition of Dao Heng Bank
Advisors: Goldman Sachs, Morgan Stanley, JPMorgan, Merrill Lynch
In the beginning, the regulators said: “Let there be consolidation in the Singapore banking sector.” And it was so. This year, DBS moved on OUB, which was swallowed by UOB, OCBC declared for Keppel, and so on.
But Singapore’s standout bank deal of the year took place September 4, when the city’s biggest institution gulped the mid-tier Hong Kong bank, Dao Heng. In one fell swoop, DBS left its Asean comfort zone and positioned itself for China growth. Asia’s bipolar banking market splits roughly between Southeast Asia and greater China. DBS lacked a meaningful presence in the latter. With Dao Heng under its belt, that changed.
So much for strategy. Criticism of the Dao Heng deal focused on price. In past transactions in Hong Kong, smaller banks have sold at a price-to-book ratio ranging from 1.3 to 1.5. Having bought Dao Heng at 3.3 times its book value, did DBS pay too much? “That’s a popular question,” says Michael Siu, a Hong Kong-based banking analyst for Salomon Smith Barney. “At the time [of the transaction] the price was deemed to be quite ‘full.’ “
But Goldman Sachs banker Rajiv Ghatalia, a principal architect of the Dao Heng deal, points to Dao Heng’s rich credit card business, which is similar in size to Chase’s credit-card portfolio bought last year by Standard Chartered (for 4.6 times book). “DBS buys Dao Heng at three times book, and everyone goes, ‘Oh my god, what have you just done?’,” Ghatalia says. But, he argues, if you value Dao Heng’s card business at the price paid by Standard Chartered for its acquisition of Chase’s credit card portfolio, “then you are really buying the rump of the franchise, which is everything else, for about 2.5 times book. That’s great,” says Ghatalia.
Still, DBS has been left to digest about $3 billion of goodwill write-off, a fact that will be dragging on its share price for the 20-year amortization period. Its purchases since 1998 — Bank of the Philippines Islands (S$1.2 billion), Post Office Savings Bank and Credit (S$1.6 billion), Kwong On Bank (S$879 million) — have depleted DBS’s once large reserves, and the Dao Heng acquisition sparked worries about the fitness of DBS’s capital adequacy ratio (a concern that was eased by the bank’s S$2.2 billion share placement in November).
For its efforts, DBS is now one of only a handful of institutions with a regional brand. HSBC and Standard Chartered are the only other banks that could make such a claim. And, with size comes economies of scale. DBS will be able to better utilize its IT spend by spreading costs over its more vast banking network. With its Dao Heng acquisition, DBS also garnered $53 million in business “synergies” (banker-speak for branch closures) in the first months following the deal signing, and it expects that figure to rise significantly.
2. Hynix’s $1.25 Billion GDR Issue
Advisor: Salomon Smith Barney
Let the record show, your honor, that the court recognizes the following facts: that the influential Salomon Smith Barney (SSB) analyst Jon Joseph upgraded the outlook for the semiconductor sector on April 12, just as his corporate finance colleagues were to market a GDR issue for Hynix, the Korean chip maker. That SSB’s parent bank, Citigroup, was exposed to the faltering Hynix for 100 billion won ($77 million) prior to the GDR launch. That, in marketing the deal, SSB forecast a Dram spot price of $2.7, whereas at the time of writing 64-megabit Drams were selling for about 50 cents. And that, three months after the issue, Hynix’s share price fell about 80 percent as the memory-chip market collapsed.
It was tough break for investors. Mark Mobius — the emerging markets maven, Templeton’s president and the man who knows the difference between Slovenia and Slovakia — publicly questioned SSB’s due diligence in the transaction. Others were more forthright. “No investor I speak to will admit to having anything to do with this deal,” says one senior buy-side figure based in Hong Kong.
What is less appreciated is that the June 15 transaction saved Hynix. SSB single-handedly recapitalized the deeply troubled company. The GDR issue was just part of that effort. Through 2001 it also rescheduled 1.9 trillion won ($1.5 billion) in Hynix debt, raised 1 trillion won in convertible bonds, and stabilized and extended short-term trade lines (of about 2.7 trillion won in value). And it did all this during a global downturn in semiconductors described routinely by insiders as “unprecedented.”
Simon Parker, a director at SSB, says this of the GDR issue: “Some investors definitely expressed dissatisfaction (with the deal) … But we were very, very clear [about] the investment risks. It was a Dram bet. We took some heat for getting the Dram price wrong, which is fair, because we launched the transaction.” Parker adds that Salomon’s view on the pricing for Dram was actually at the low end of the market consensus.
For all Salomon’s efforts, Hynix lives to battle in the gladiatorial Dram arena another day. Analysts still question Hynix’s long-term viability — its debt load continues to impair its capex abilities, critical for any semi operator. But Hynix has scraped through an impossibly difficult year with a degree of solvency and into a chip market that can only go up. In the words of CEO CS Park: “We are greatly indebted to Salomons … this company (Hynix) has much improved strategic options because of SSB’s recapitalization. Our debt was restructured, and now our success will depend on our operational ability and our technology.”
And Hynix is continuing its recapitalization. As of the end of November, the company completed stage two of its restructuring, in which creditors are swapping $2.3 billion of debt into convertible bonds, forgiving some $1.2 billion of debt and injecting over $500 million, and there is a rights offering in the works. Since the closing of the latest recapitalization, Dram prices had risen over 50 percent from their lows and by mid-November, Hynix’s share price was rising sharply on heavy volume.
3. Huawei Technologies’ $750 Million Sale of Avansys to Emerson Electric
Advisors: Morgan Stanley, JPMorgan
Trailblazers make the rules. Huawei Technologies and Emerson Electric know this better than most. When the Chinese telecom equipment maker sold its wholly owned telecom power conversion subsidiary, Avansys, to US-based Emerson, no rules yet governed the sale of a private, employee-owned Chinese company to a foreign enterprise. None still exist. But the details of the deal that pleased China will figure in its future guidebook on foreign-led acquisitions.
Indeed, the deal’s quick completion is a tangible indication that China is changing for the better. Huawei decided to sell Avansys in mid-2000. Emerson’s bid came by autumn. Not long after, both agreed on a valuation. They soon sought the approval of Shenzhen officials, then elevated it to the central government, which then circulated it to various state agencies.
The thumbs-up came on October 21, three weeks before China entered the World Trade Organization. Given that China spent years perfecting the Sino-foreign joint venture concept, this is lightning fast. The lack of precedence meant that Emerson and Huawei only had their common sense to guide them – China’s criteria in deciding whether a deal goes ahead are not the same as a Western government’s, say advisors. “It looks at whether all parties benefit,” says a banker involved in the deal. “The deals need to be good for the affected employees, the business landscape and the country as a whole.”
It helped that Emerson is a 13-year China veteran. The $15 billion-a-year electronics giant has 66 factories in China, so it knew what to do: pay in cash, keep all 1,400 Avansys staff, train them, and transfer technology. “Emerson is very excited about the employees and management of Avansys, and it will make every effort to retain and train them,” says Danny Wai, managing director at JPMorgan, which advised Emerson.
Emerson paid 2.4 times enterprise value (net debt over value of equity) over Avansys’s 2000 revenues of $217 million, says Wai, a high price at a time when comparable companies are suffering from slumping tech demand. Emerson’s defense: Avansys’s operating margins are higher than its own, and its 32 percent market share in China is triple the closest competitor’s.
Emerson may in fact have acquired Huawei on the cheap. As one banker says, price was a secondary consideration for Huawei. It would continue to buy Avansys products, so its trust of the buyer was of major importance. “The key for Huawei is to build a lasting and mutually beneficial relationship with Emerson,” he says. And nowhere is a relationship more coveted than in China.
4. SingTel’s $10 Billion Acquisition of C&W Optus
Advisors: Morgan Stanley, JPMorgan, Merrill Lynch
It was not an auspicious start. Investors took SingTel’s share price down by a third in the weeks after it announced its bid for Cable & Wireless Optus. The offer was too rich, said SingTel investors. The deal was also too foreign, said critics. Indeed, the SingTel board includes membership by Brigadier General Lee Hsien Yang (son of Senior Minister Lee Kuan Yew) and Lieutenant General Lim Chuan Poh, Singapore’s Chief of Defense Force.
At the same time, Kerry Stokes, the executive chairman of the Sydney-based Seven Network, fretted that Australia’s number-two telco would come under “foreign control.” Notwithstanding the fact that Optus was previously 52 percent owned by London headquartered Cable & Wireless, Stokes and his Seven Network railed against the acquisition in a submission to Australia’s Foreign Investment Review Board (FIRB). “Given the authoritarian and arbitrary nature of the Singapore government’s regime, and its widespread use of intrusive surveillance, there are grave concerns about Australia’s national security interests,” said the submission.
Optus shareholders were also concerned. Their telco had prospered in Australia’s tough mobile market, taking on dominant carrier Telstra. How could government-controlled SingTel, whose telecoms industry only entered full liberalization in 2001, compete in hardscrabble Australia? In the end, shareholders were won over by SingTel’s price and the flexibility of its offer. Fully 98 percent of Optus investors came to support the deal, finalized September 17, which also found approval from FIRB, Australia’s Department of Defense (it shared a satellite project with Optus) and the US State Department (it had to approve Singapore control of sensitive US technology).
SingTel’s own shareholders weren’t so pleased. The company’s share price fell about 40 percent from when its Optus intentions became known to the time of acquisition, in September. But its $10 billion transaction, Asia’s largest M&A of the year, has turned the company into what it has long aspired to be: a competitive, regional player in fighting-fit financial shape. SingTel was already invested in more than 20 countries, but the Optus acquisition pushes its non-Singapore revenue from about 10 percent to more than half.
Other benefits of the much-discussed deal: SingTel has found a second listing on the Australian Stock Exchange, it has completely drawn down its cash reserves (its previously underutilized billions had long made investors uncomfortable) and it has expanded its free float from 22 percent to 32 percent, diluting government ownership of the utility. Next year will show what it can do with Optus as a business.
5. Korea Tobacco & Ginseng’s $244 Million CB and $309 Million GDR
Advisors: UBS Warburg, Credit Suisse First Boston
Korea Tobacco & Ginseng (KT&G) and Korean finance ministry officials were checking in to a morning flight from Seoul to Singapore on September 12 when they received the call they feared. The shutdown of the US financial markets in the wake of the terrorist attacks meant they had to postpone roadshows for the privatization of KT&G. Undaunted, they held a teleconference right there at the airport with financial advisors UBS Warburg and Credit Suisse First Boston and set up a new schedule for the end of October.
The wait paid off. On October 26, KT&G successfully pulled off the first sizable deal in Asia after 9/11 — a combined $553 million convertible bond (CB) and global depositary receipt (GDR) issue. The attacks sparked a preference for securities with downside protection and upside potential. The KT&G convertibles, no surprise, were 17 times oversubscribed. The demand created enough buzz on the quality of KT&G that equity investors, who normally buy GDRs at a discount to underlying shares, paid for KT&G at parity, a first for Korea since 1997. The GDRs were four times oversubscribed.
“We achieved our goal of creating demand tension between the two issues, and optimized the [GDR] price,” says Nicholas Andrews, head of equity capital markets at CSFB. “KT&G also benefited in that it was the only deal for investors to focus on [after the attacks].” Adds Rex Chung, his counterpart at UBS: “Equity investors took comfort and consolation in KT&G’s strong (BBB/Baa2) credit.”
Comfort did not come from credit alone. “What made a big difference to investors was KT&G’s very clear articulation of what their dividends are going to be,” says Andrews. KT&G assured investors they would receive at least 1,400 won ($1.1) a share this year, a slight increase from 2000; next year’s would move alongside profits. As a result, KT&G walked off with the funds it needs to brace its tobacco business against deregulation, from a broader investor base, and without distorting its capital structure.
The government received a solid price for its shares and investors added a defensive asset to their portfolio — KT&G still holds 80 percent of the market, and its operating margin continues to grow, almost doubling from 15 percent in 1998 to 29 percent this year. The moral: braving tough market conditions can pay off.
6. Haitai’s $321 Million Sale of Its Confectionery Business to a Private Equity Consortium
Advisors: ABN Amro, JPMorgan
Haitai Confectionery has kept generations of South Korean dentists in business since it started production in 1956. Over the years, it has become the second-largest sweets and biscuits producer in the country while diversifying into electronics, dairy and construction. It even keeps its own professional baseball team. The sprawl of businesses, however, didn’t survive the 1997 financial crisis. Haitai collapsed under $3 billion of debt and was declared bankrupt in 1999. Since then, the company has been run by a core group of creditors who have stalled liquidation by endless court protections.
The breakthrough finally came in September this year. With ABN Amro as advisor, Haitai Confectionery managed to sell its main profit generator, the confectionery division, to Haitai Foods Products, a company formed by a consortium of three venture capital firms, CVC Asia Pacific, JPMorgan Partners and UBS Capital. The price, $321 million, was accepted by a committee representing the overwhelming 100-odd creditors.
The deal broke some interesting ground. The confectionery division earned $33 million before interest and tax last year, on group sales of $442 million, and was sold as a standalone operation. The buyers assume no responsibility of the enormous debt which the Haitai group is burdened with. Instead, the $321 million was calculated to cover the assets of the confectionery business only.
At the same time, the buyers are not allowed to touch Haitai’s cash reserve, which is left for the rest of the Haitai group. David Lai, president of UBS Capital in Asia says: “There is a feeling among the lenders and the creditors that a great Korean brand should not be allowed to sink. After all, the confectionery business has managed to do very well despite problems in other parts of the group.” The consortium pulled off an impressive LBO to fund the acquisition — a five-year revolving credit, a multi-tranche five-year term loan and, for the first time in Korea, a seven-year term loan. The syndication was received positively by both local banks and insurance companies and was three times oversubscribed.
According to Martijn van de Wiel, assistant director of ABN Amro Asia’s corporate finance, this acquisition was made easier by a new piece of legislation in South Korea that makes it easier to approach a large group of creditors. “In the past, the buyers either negotiated private work-outs with individual creditors, or relied on a court-led receivership process which can take up to nine months to arrange a sale.”
Van de Wiel says the new option, known as the “pre-packed” plan, makes approaching a group of creditors much quicker. It allows the creation of a committee, led by the main creditors, to decide the fate of the company as long as the plan is approved by at least 50 percent of creditors. The Haitai deal was the first Korean acquisition to make use of the new law, took just over half a year to close, and brings a glimmer of hope to Korea’s corporate reform.
7. CNOOC’s $1.43 Billion IPO
Advisors: Credit Suisse First Boston, Merrill Lynch, Bank of China International
Rewind to October 1999: At a time of resurgent equity markets, the China National Offshore Oil Corporation (CNOOC), or the star of China’s privatization offerings, is seeking a listing. It should have been a lay-up but, at an embarrassingly late stage, the deal is pulled as bankers belatedly realize they have overpriced.
Painfully, CNOOC is pushed to the back of the privatization queue to watch the two other members of China’s petrochemical holy trinity, PetroChina and Sinopec, quickly come to market with a pair of jumbo issues. It hurt because CNOOC is widely regarded as the better company. The firm achieves about a 21 percent return on capital employed, or about double what PetroChina and Sinopec manage. It also has mammoth oil reserves (1.8 billion barrels), attractive foreign partnerships and a progressive, investor-friendly management team.
Fast forward to winter 2001: CNOOC again has clearance to issue. But by this time global markets have absorbed about $16 billion in China equity, investor sentiment has turned as sour as old milk, oil prices are falling and Sinopec and PetroChina are both underwater.
CNOOC and its banking troika press on and — following a pair of exhaustive three-week roadshows; two teams fanned out to market the deal — pluck victory from the jaws of investor malaise: They release a shade under $1.5 billion into the New York and Hong Kong exchanges on February 22. The firm sees its institutional offering 5.7 times oversubscribed, finds sufficient demand to exercise its greenshoe — an optional share placement banks can make if the offer goes smoothly — and prices at the high end of the indicative range.
CNOOC CFO Mark Qiu praises his investment bankers, describing their efforts as “fabulous.” The kudos is all the more credible given that Qiu was part of Salomon’s team that flubbed the 1999 offering (Qiu, however, was impressive enough to be recruited into the firm). “Typically failed deals are tainted in the market, but it didn’t happen to CNOOC,” says Qiu. “The results show that CSFB, Merrill Lynch and Bank of China were successful in separating market conditions from the company’s investment thesis. Investors didn’t say, ‘I don’t want to apply this time because the first time failed.’ “
CSFB bankers Douglas Reynolds and Nicholas Andrews, who were both deeply involved in the CNOOC IPO, say the company turned weakness to strength in its market reprisal. “Investors compared what the company told them in terms of predictions for earnings growth, production growth, investments, strategy, with what the company told them the second time, and they found that the numbers were consistent. CNOOC was meeting all its benchmarks,” says Reynolds.
CNOOC has not disappointed. Oil prices have fallen by about a third since CNOOC’s IPO, but its ADS remains well above issue level and has handily outperformed PetroChina and Sinopec.
8. Hutchison Global Crossing’s $564 Million Financing Package
Advisors: Citigroup, ABN Amro, Commerzbank
Hutchison Global Crossing (HGC) was set up in 1999 as a joint venture between Hong Kong-based conglomerate Hutchison Whampoa and Los Angeles-based telecom company Asia Global Crossing. Its purpose: to build the first building-to-building fiber-optic broadband network in Hong Kong. Looking for greenfield financing for its capital and operating expenditure at the beginning of this year, HGC was faced with more than the lack of investment interest in the telecom sector in general, but also the challenge of convincing investors that there will be good returns from what is essentially a new technology from the market’s point of view.
Extra work was put into designing the structure of the offer to garner confidence. It paid off in September, with the deal becoming 40 percent oversubscribed. The lenders are promised full security over assets and shares in HGC, including its valuable licenses. In addition, they are guaranteed a part of the proceeds of a future IPO as well as a 50 percent share of excess cashflows. “It is often difficult to forecast revenue of a new telecom service. Lenders to HGC will receive half of what is made in excess of original expectations,” explains Saadia Khairi, regional head of project and structure trade finance at Citigroup.
HGC may have sweetened the deal for lenders, but it retains full operating flexibility and has the right to change business plans to adapt to changing market conditions. The $564 million loan comes in two tranches: a $282 million five-year facility at 145 pasis points above the Hong Kong interbank rate and a $282 million seven-year tranche at 180 basis points over HIBOR.
The bankers had a scare, however, when it became clear that the HGC financing would be syndicated around the same time Hutchison Whampoa was arranging a $2.65 billion loan for its 3G activities in the UK. Worse, the 3G financing was syndicated globally rather than in London, as was originally planned, and a lot of coordination took place in Hong Kong, adds Khairi.
Fortunately, Hutchison Whampoa’s credit was enough for both. In fact, the deal received such a good response in the sub-underwriting stage that HGC could do without a costly and time-consuming general syndication. The deal marks the first time a non-incumbent carrier in Asia approached the project finance market for major financing and its success is an important indication of investors’ interest in opportunities available in the non-traditional realm of the telecom sector.
9. Indosat and Telkom’s Resolution of $1.5 Billion of Cross-Shareholdings
Advisors: Salomon Smith Barney, Credit Suisse First Boston, Danareksa, Booz-Allen & Hamilton, NM Rothschild & Sons
The combined value of the equity and cash swap agreement between PT Telekomunikasi Indonesia (Telkom) and Indonesian Satellite Corporation (Indosat) came to $1.5 billion, making it the largest M&A transaction in Indonesia to date. Yet, numbers aside, the significance of the May deal is that it has changed the face of Indonesia’s telecom industry for good.
The two telcos used to be the archetypal state-run behemoths of a restricted sector, and their privatization in the 1990s did not alter their dominance in the market. Telkom, 66 percent government-owned, enjoyed a monopoly over the local fixed-line service while Indosat, now 65 percent state-owned, held the satellite and IDD networks. Indonesia has lagged behind the wave of telecom liberalization in Asia these last few years.
The result has been slow growth, high prices and very little innovation. Shareholders were especially miffed about how both companies failed to cash in on the young and vibrant mobile sector. The reason wasn’t hard to find. The two telcos enjoyed monopolies over the country’s backbone networks, while the mobile space as well as the numerous regional phone companies were often run by foreign or smaller players. They were granted licenses to do so by forming joint ventures with both Telkom and Indosat concurrently, giving them the right to offer both local and IDD services. The pressure to resolve the cross-shareholding came from high places. The International Monetary Fund held back a $5 billion loan to the Indonesian government last year because, among other things, it was not pleased with the speed of Indonesia’s corporate reforms.
As a result, the two telcos are going to have their monopolies taken away in 2003, thus forcing them to transform into integrated telecom service providers in order to compete with new local competitors and foreign players. The main contention was who would get the crown in the jewel, Telkomsel. The largest mobile network in Indonesia made $140 million in profit last year, while Satelindo, its closest rival, lost $92 million. Both Telkom and Indosat had stakes in both. “After almost six months of fighting over who should get Telkomsel, we had to acknowledge that if we didn’t change our stance, the cross-ownership would never get untangled,” said Budi Prasetyo, Indosat’s executive vice president.
The agreement, hammered out with the aid of a staggeringly long list of advisors, ended up pleasing both sides. Indosat didn’t just get Satelindo as compensation. Telkom also handed over its stakes in a data center called Lintasarta plus $364 million from its own coffers. Since the sales, the two companies have been competing head to head in virtually every segment of the market and injecting life into the trouble-plagued Indonesian economy.
10a. UOB’s $5.7 Billion Acquisition of OUB
Advisors: Morgan Stanley, Merrill Lynch
10b. UOB’s $3.6 Billion Subordinated Debt
United Overseas Bank and its financial advisors appear to know the art of war. When DBS Bank made an unsolicited bid to acquire Overseas Union Bank, which followed Keppel Capital’s bid for OCBC Bank, UOB was threatened with being left alone in a consolidating sector. UOB had the option to fight an easy battle with financially weaker OCBC over a cheap asset, or to fight with the biggest bank in Singapore over an expensive bank.
UOB went for number one and scored a hands-down victory. Its strategy was classic in its simplicity — understanding its opponent’s strength. DBS had just acquired Dao Heng Bank of Hong Kong for a widely criticized valuation of 3.3 times book value. UOB knew this dented DBS’s financial strength, which showed in its low-on-cash, high-on-shares offer for OUB. UOB dwarfed it by offering four times as much cash. This was strong enough for UOB keep the total value of its offer, S$10 per share, at the low end of the range it was prepared to pay. “It was clear that many institutional investors were focused on getting cash out,” says Kalpana Desai, head of Asia Pacific mergers and acquisitions for Merrill Lynch, which advised UOB. She explains: “In domestic bank mergers, the share price of the offer almost always falls, so it’s always good to have a hard cash underpinning. DBS could always increase the share element, but we were reasonably comfortable that they would struggle to increase the cash element.” It was just what OUB investors wanted. In the afternoon of June 24, a day after DBS bid for OUB, UOB chairman Wee Cho Yaw presented his offer to OUB chairman Lee Hee Seng.
The result was an irrevocable acceptance of the UOB offer by shareholders representing 26.5 percent of OUB. This, coupled with UOB’s cash-strong offer, deterred DBS from moving further. But DBS added insult to its own injury by criticizing the potential UOB-OUB combination as a design “to keep family control intact, without regard to shareholder value.”
DBS lost not just face in apologizing for the conduct, but also the sympathies of OUB investors, many of them individuals. UOB and Merrill Lynch, OUB and advisor Morgan Stanley then educated shareholders about the UOB offer, with the first “plain English” offer document to come out of Asia — a prospectus that simplifies the legalese with bullet points and color graphics — setting a standard for transparency.
Not long after the victory, JPMorgan underwrote UOB’s subordinated debt to strengthen its capital in a first-of-its-kind deal in Asia. The result was a cheaper fundraising exercise even as the market had been saturated with earlier DBS and OCBC issues. “UOB was the last to do an acquisition and raise capital, but it adopted a creative structure which was very capital-efficient,” says Marc Jones, head of Asia Pacific debt capital markets at JPMorgan. ADR
For more on deals and capital-raisings in Asia, see CFO Asia (www.cfoasia.com).