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March 2006 Issue
In Brief

Buyout in China is Taking Shape but it calls for careful planning, unrivalled network of connections and precision timing as illustrated by China Glass' recent takeover of a host of glass companies in China Feature
The Sale of Korea Exchange Bank has not only been a marathon process but also been plagued by a stream of unpleasant events that underscore the hurdles of exits Analysis
Buyout Limelight Shifts to Australia & Singapore as both markets register vibrant investment activities Buyout
Fund of Funds Are Booming with AXA Private Equity's latest initiative being another statement of institutional investors' choice to Asia Institutional Corner
China's Aspiring Entrepreneurs are positive on foreign venture capital funds Greater China Corner
A Hostile Takeover is Brewing in Taiwan suggesting the island is ready for institutionalised mergers and acquisitions Greater China Corner
Travel Industry in India is the Latest investment focus for private equity investors India China
Domestic and Foreign Buyouts investors clinch two deals, suggesting buyout movements are picking up pace in Japan Japan Corner
Content

Pan Asia
News
Funds
Buyouts
Divestment

Institutional Corner

Greater China
News
Acquisitions Momentum
Buyouts
Growth/Expansion
Technology
Divestments

India Corner
News
Funds
Buyouts
Technology

Japan Corner
News
Buyouts

Summary
Index & Exchange Rates

A Buyout Legend

The titans of the buyout industry have spoken: China is the next market. During the past few months, the Asian private equity industry witnessed a flurry of activity undertaken by global buyout houses to bolster their Greater China resources. Both Bain Capital and Kohlberg, Kravis Roberts & Co. have made their respective recruits of senior managers whose expertise is in Greater China. Despite the sheer size of the China market, buyout deals have largely evaded the preying net of hungry investors. In the 26 months ending February 2006, China boasted an US$8 billion aggregate of transactions, with companies that were prepared to grant investors the privilege to control their business accounting for only 11.4%, at US$914 million.

In mid-February, China’s first known buyout fund management firm, Legend Hony Capital Ltd. (‘Hony Capital’), a wholly-owned subsidiary of Legend Holdings (‘Legend’) achieved a new milestone for China buyouts by executing a landmark transaction. It was the most extensive structural overhaul of a group of state-owned enterprises. Through a series of acquisitions via its Hong Kong-listed China Glass Holdings (‘China Glass’), Hony Capital is now in control of no less than 70% of the China glass market. It is a buyout that was consummated through careful planning over a 2-year time period, supported by an unrivalled network of connections and with precision timing.

The Legend Began

China Glass came to Hony Capital through its parent company, Legend, China’s undisputed leader in the information technology domain. In December 2003, the glass assets held by the Jiangsu Province Suqian City State- Owned Assets Bureau was sold to two groups of investors, Easylead Management Ltd. (‘EML’) and Right Lane Ltd. (‘RLL’) for 6.5 million yuan (US$786.26 million). Although Legend, through RLL, officially held a 40% stake in Suquian SAMC, the holding company of Jiangsu Glass Group (‘Jiangsu Glass’), it was in effect the controlling shareholder. At the time of the transaction, two of the three shareholders in EML held or previously held senior offices in Legend. Mr Cao Zhijiang was vice president in Legend, while Mr Liu also held the same position until his retirement in 2001. The third shareholder, Mr. Zhang Zuxing, was also a director in RLL.

Following the transfer of shares, Suqian SAMC held a 63.35% interest in Jiangsu Glass with two state-owned asset management companies taking up the residual percentage. Huarong Asset Management held...

Analysis

Exit Obstructed

Lone Star facing mounting frustration in its sale of Korea Exchange Bank

For nearly a year, Lone Star has been known to be preparing to dispose of its 51% shareholding in Korea Exchange Bank (‘KEB’), but the sale looks like a drawn-out process, clouded by a series of negative coverage of events relating to the bank. When Commerzebank AG announced its intention to reduce its holding in KEB from the existing 14.75% to 6.75%, KEB’s share price witnessed an immediate plunge, from 14,000 won (US$14.63) at the end of February to 13,000 won in the next trading day. At the same time, Japan’s Financial Services Agency has ordered KEB to suspend its foreign exchange remittance operations for a period of three months. This penalty relates to alleged illegal remittance transactions of large sums of money for a remittance agent that operated without the appropriate licence.

As the disposal of KEB enters its second year, the sale scene has changed substantially. It is drawing passive interest from foreign institutions. In the latest round of expressions of interest, both Kookmin Bank and Hana Financial Group are known to be the forerunners. The former is teaming up with Citigroup, while the latter is partnered with Goldman Sachs. No single foreign financial institution is participating in this round of bids by itself.

When Lone Star was first known to be preparing the sale of KEB, there was intense speculation that HSBC Holdings would be the prospective buyer. The UK-based bank had just lost the battle for KorAm, in which Standard Chartered Bank claimed that trophy. Shortly after it became known that HSBC was no longer courting KEB, there were reports that Singapore’s Temasek Holdings was mulling over plans to become the possible buyer, but no further development surfaced.

But the protracted, and yet high-profile, sale of KEB began to fuel domestic ire over the hefty profit that Lone Star would make from this disposal. Lone Star stood to reap at least US$1.5 billion from its sale of its 51% equity stake in KEB, assuming that the latter is valued at US$5 billion. Yet the sale of the once government-owned bank has become a political football. According to the Financial Times, South Korea’s main opposition party, the Grand National Party, is requesting a parliamentary committee to intervene in the sale. Local lawmakers are also investigating whether Lone Star has manipulated the capital adequacy ratio of KEB, facilitating it to pay a discounted price when it acquired the bank. The Korean general public demands the dispute to be resolved before the sale of KEB can proceed.

With the obstacles to selling KEB fast building up a wall, Lone Star found itself even more alone when Commerzbank, the staunchest and largest foreign investor in KEB, decided to reduce its holding in the bank. It was the second time that Commerzbank has decided to sell its shares in KEB. The timing could not have been more testing for Lone Star.

Between 1998 and 2000, Commerzbank had invested a total of 820 billion won and held a 32.55% equity position in the lender. In August 2003, in order to become a controlling shareholder of KEB, in addition to shares that it acquired from the government, the restructuring specialist Lone Star bought 26.238 million shares from Commerzbank at 5,400 won each. That was the first time when Commerzbank parted with its holding in KEB since it first became a shareholder in 1998. The latest intended sale by Commerzbank represents a disposal of 51.11 million shares, and will lower its holdings in KEB from 14.75% to 6.75%.

While Lone Star attempts to combat the “domestic” issues, unpleasant developments arose from its branches in Japan. In early March, Japan’s Financial Services Agency penalised KEB’s Tokyo and Osaka branches for allegedly having remitted more than ¥10 billion (US$86.27 million) to South Korea over a period of four years. KEB was accused of having “repeatedly and continually accepted illegal remittances”. The Tokyo and Osaka branches were ordered not to accept foreign exchange remittance orders for a period of three months commencing from 9th March, to 9th June.

It will take an unfaltering determination and careful planning for Lone Star to reverse the negative tides arising against it in South Korea. The exit from KEB is a telling saga to all buyout investors of the mounting political and cultural hurdles they could face in extracting maximum value from invested companies. This incident might not be an isolated case.

KEB is probably the last crown jewel in the banking and finance sector in Asian buyouts. Lone Star’s sale of its holding in KEB, when completed, may be an enlightening process to all buyout investors in Asia.

Greater China Corner

The Partnership

China’s aspiring entrepreneurs are positive on venture capital financing

Within a short space of one month, China’s venture capital industry welcomed an additional US$490 million into the market. IDG-Accel China Growth Fund, the joint venture fund between Silicon Valley-based Accel Partners and IDG Technology Venture Investment LLC closed at US$290 million. Ignition Partners, an independent venture capital management firm that is based in Seattle, USA unveiled its Sino plan. It announced a partnership with Qiming Venture Partners and their intention is to direct US$200 million to the China venture capital market in the next few years. The latest movements underscore foreign venture capital houses’ optimistic assessment of the future prospects in the China market.

Indeed, foreign venture capital investors have successfully demonstrated their value to China’s aspiring technology companies. Virtually all China portals listed on NASDAQ had received financing from venture capital firms prior to their public debuts, further confirming venture capital’s paramount role for young technology companies in China.

Mr David Zhu, chief executive officer of Allyes (China) Holdings Co. Ltd. (‘Allyes’) emphasised that his company was seeking more than just capital from its investors. In August 2003, Allyes received US$30 million from both IDG Technology Venture Investment and Oak Investment Partners. In explaining the rationale behind Allyes’ approach to investors, Mr Zhu pointed out that the required funds were used “to deepen research and development capabilities, broaden the company’s network, as well as having the cash to undertake necessary acquisitions”. Mr Zhu hinted that the company is strengthening its assets as it prepares for its initial public offering with NASDAQ, albeit with an unknown schedule.

The chief executive officer of 99bill.com, which received funds from Doll Capital Management and Peninsula Capital, Mr Oliver Kwan was much more explicit in espousing the expectations of entrepreneurs. To Mr Kwan, a venture capital provider must have a successful investment record in Greater China and the ability to understand the cultural issues in the region, in addition to having a brand name as well as the capability to assist the investee company to become a publicly-listed company. He also believes that the pool of managerial skills that 99bill.com has been able to draw on as a result of venture capital financing is crucial, at a stage when the company embarked on its next phase of development.

Both Doll Capital Management and Peninsula Capital have the credentials to meet 99bill.com’s requirement. The former is a financier of 51job.com which made its legendary debut on NASDAQ in October 2004. Peninsula Capital was among the earliest investors in Baidu.com which went public mid last year, leaving an envious debut record that remains unrivalled.

Although foreign venture capital has a nascent history in China so far, it has received positive reviews from those who have benefited from such financing. Mr Li Tao, chief technology officer of 5173.com, which received funds and from IDG Technology Venture Investment, was forthcoming in his remarks. He indicated that following the infusion of capital from IDG Technology Venture Investment, 5173.com has been able to develop a solid and efficient management team. “Our subscribers soared to 4 million instantly”, said Mr Tao.

A spokesman from Target Media described the funds coming from The Carlyle Group as a “virtual platform to the international horizon”. This came true when Target Media agreed to consolidate its outdoor advertising position with Focus Media late last year. Following the merger, the enlarged Focus Media is the undisputed leader in outdoor advertising, commanding 80% of the market share.

51job.com also shared a similar story. A year after Doll Capital Management had invested in the company, its revenue soared by 8-fold. Following three-years of solid growth and convincing results, 51job.com was able to achieve its listing dream.

China’s aspiring entrepreneurs have the common goal of being a quoted company on NASDAQ. Mr Kwan of 99bill.com was unreserved when he said that “while venture capital investors have been very forthcoming in providing funds, few have a very clear path as to how to assist their China portfolio companies post listing”. For all those that are courting China-based companies, this is a statement of reality. Mr Zhu of Allyes echoed Mr Kwan’s views in admitting that it was not difficult to raise the desired capital, as did Target Media which took less than 100 days to secure funds from The Carlyle Group. Significantly, it is the venture capital firm’s ability to assist with a company’s development without interfering with the operational activities that provides a level of comfort to investee companies. As competition for deals intensifies, investors’ ability to convey clearly to target companies their unique advantages have never been more important in order to cultivate the partnership.

Greater China - Buyout

Positioning for Control

Buyout mood in Taiwan reaches a new stage as the island witnesses a high-profile hostile takeover

For more than two decades China Development Financial Holding Corp. (‘CDFH’), through its China Development Industrial Bank, has been closely associated with Taiwan’s venture capital industry. The island’s 13th largest financial holding group is casting itself in a new role and fuelling buyout movements in the island.

In early March, it disclosed the successful public tender offer for the common shares of Taiwan International Securities Corp. (‘Taiwan International’), concluding another major step in its quest to take a controlling position in the target company.

After a public tender offer period of 11 days, 63 million shares of Taiwan International went into the hands of CDFH, bringing the latter’s holdings, along with those held by its other subsidiaries, to 32.08%. CDFH paid NT$14 (US$0.43) a piece for each of Taiwan International’s shares, representing a deployment of NT$882 million or US$27.56 million.

CDFH is resolute in its efforts to take over Taiwan International. It embarked on its acquisition trail in August last year in what Taiwan International described as a “malicious” advance for its shares. It has moved swiftly to accumulate the desired stock. In November, its holdings in Taiwan International was 28.7% which was increased to 32.74% in early December. In a statement released by CDFH in early February, it revealed that the financial group, including affiliates China Development Industrial Bank and its private equity investment arm, CDIB & Partners, have already accumulated 36.44% of Taiwan International’s shares (prior to enlargement of capital). The NT$14 offer price was seen as an attractive price, as the share price of Taiwan International was trading at NT$13.40 two days before the conclusion of the public tender offer.

CDFH will have to wait for another two months before it can claim victory over Taiwan International, in one of the very first hostile takeovers in the island’s financial community. It is in a favourable position to become the winner. According to reports in Taiwan, one of the existing shareholders in Taiwan International intends to align with CDFH, which will lift its holding in the prey company by an additional 10%.

In August last year, in order to fend off the unfriendly advances from CDFH, Taiwan International began to approach three smaller rivals to merge in an attempt to boost its capital. While it has been successful to acquire First Securities and Far East Securities, it failed to clinch a deal with Global Securities Finance Corp. as the latter’s board members could not reach an accord over this matter. This CDFH move advances the buyout movements that are taking place in Taiwan, as the island’s financial establishments seek to bolster their muscle. However, the local direct investment community is unlikely to take up significant buyout deals as the island recorded less than ten buyout funds, each with relatively small size.

News

Acquisitions Momentum

Newbridge Capital’s recent purchase of shares in Taishin Financial Holdings (‘Taishin’) brought to light vibrant merger or acquisition activities in the Taiwanese financial community.

ChinaTrust Financial Holdings (‘ChinaTrust’), the fourth largest financial holding company in Taiwan, recently made known its intention to deploy at least US$1 billion during the year to take up substantial stakes respectively in two of the island’s largest financial companies.

ChinaTrust plans to buy shares in the government-controlled Mega Financial Holdings, (‘Mega’) Taiwan’s second largest financial holding company. As of mid-February, ChinaTrust has accumulated 3% of Mega’s shares. Based on Mega’s prevailing share price, it would cost ChinaTrust an estimated US$860 million to attain a 10% equity position in the target company.

ChinaTrust also surprised the market by making known its intention to secure a 15%-20% equity stake in China Development Holding Corp..

China Development Financial Holdings is currently positioning itself to increase its stake in Taiwan International Securities to 50%.

Since last year, Taiwan has registered a series of share acquisition movements by both local and foreign investors. In July, Taishin committed NT$36.6 billion (US$1.15 billion) for taking up 22.5% of Chang Hwa Commercial Bank, allowing the buyer to take control of the bank. In early January, GE Consumer Finance took up a 10% stake in Cosmos Bank for NT$2.76 billion (US$86 million). The deal provides GE Consumer Finance the option to take a controlling position in the bank when the foreign investor decides to raise its holdings to 29% with additional capital.

The next foreign investor group that will further consolidate its position in the Taiwan market is the American International Group. It has agreed to take up a 52% equity stake in Central Insurance Co. by buying the shares held by two existing investors of the insurance company. The deal is valued at NT$6.05 billion or US$187 million. There are also suggestions that Ingram Micro Inc., the world’s largest technology distributor is eying a take over of Weblink International Inc., a subsidiary of Acer Inc. that is a leader in the Taiwan’s technology production distribution market.

The winds of mergers and acquisitions appeared to have arrived in Taiwan. With the government determination, merger and acquisition activities could dominate the island’s financial market in 2006. (China)