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Janaury 2008 Issue
In Brief

A-Share is To Be a Central Factor in China portfolio exit strategy Feature
Investors Focus on Portfolio Building as they seek to refine their competitive edge Analysis
Sovereign Funds Draw Attention as their economic prowess could be foreboding Institutional Corner
SE Asia Beckons with Mushroom of launched Funds
Bidding Saga for AIAL epitomises deal hurdles facing investors Buyouts
Domestic Investors are Buyers of private equity assets, especially in South Korea Divestments
Yuan-denominated Funds to Govern China’s fund pool Greater China – Funds
Domestic Investors are Closing Deal gap with their foreign counterparts Greater China – Investments
Focus Media’s Takeover of CGEN is a win-win for all Greater China – Divestments
India Proves It Is Deal Centre of Asian private equity India Corner – Investments
A Buyout Exit Shows Attractive returns can be achieved in control deals in India India Corner – Divestments
Astute Investors Take Advantage of Tokyo Star Bank’s declining share price Japan Corner – Buyouts
Content

Analysis
Focus
Institutional Corner

Pan Asia
News
Funds
Investments
Waiting to Take Off
Buyouts
Divestments

Greater China
News
Funds
Investments
The Makeover
Divestments

India Corner
News
Investments
Growth/Expansion
Divestments

Japan Corner
News
Buyouts

Subscriber Weekly Summary
People on the Move
Summary
Market Watch
Index & Exchange Rates

Paradigm Shift

As the curtain fell on 2007, a new record was set for initial public offerings (‘IPOs’) in Asia. During the year, over US$339 billion globally has been raised through offerings to the public, a surge of more than 25% compared to the US$272.0 billion for 2006. In these 12 months, Asia, in particular China, stole the IPO show. Funds raised through public offerings at its three bourses, the Hong Kong, Shanghai and Shenzhen stock exchanges commanded a towering US$100.4 billion, compared to the US$59.9 billion for 2006. The Hong Kong Stock Exchange (‘HKSE’) has long established its pristine position as one of the major public offering platforms. However, its two sister affiliates in the People’s Republic of China have not only clearly displayed their rising might in the global stock markets, but are also beginning to govern the portfolio profiles of Asian private equity investors. For public debuts on China’s A-share market has so far proven to be a central element in recording alluring returns, at least on the books.

Rising Star in the East

In 2007, there were 140 companies known to have raised capital from 270 private equity investors prior to their respective public offerings. Those with core operations in China took the lion’s share, accounting to 89, or 63.6%. Companies based in Japan and India trailed behind as a distant number two and three respectively. During 2007, there were 21 Indian companies that had received private equity and went public. Although both China and India were among the two economies that have been enjoying an economic growth of between 8% to 11% per annum, and are expected to sustain such rates in coming years, there is a vast disparity in the price/earnings ratio multiples that investors were prepared to accept for China and India stocks respectively. On average in 2007, the IPO price of those China stocks traded on the A-share market secured 40 times of their price/earnings ratio, while that for India is 20 times. It is, however, the tantalising first day performance, especially in the A-share market, that has further mesmerised investors. Among the 110 Indian and Chinese companies that had received funds from private equity investors that went public during 2007, only ten encountered a negative first day trading performance to their offer price. But, for those that went public on either the Shanghai or Shenzhen bourse, there were no disappointing debuts. On the Shanghai bourse, ...

Pan Asia - Investments

Waiting to Take Off

Investors still awaiting the Auckland Airport deal to take off

A deal was done, at least in Australia. The Carlyle Group (‘Carlyle’) bid farewell to 2007 by toasting the completion of the buyout of Coates Hire Ltd. (‘Coates Hire’) with National Hire Group Ltd.. The consortium won 94.86% of votes cast by the shareholders of Coates Hire, which endorsed the A$6.59 (US$5.76) per share takeover. The deal added a towering A$776.8 million to Australia’s 2007 buyout deal sheet, which plunged to US$5.7 billion, a 60.8% decline compared to the US$14.4 billion recorded for 2006.

As Carlyle prepared to take a 47% stake in one of Australia’s largest equipment rental companies, another party of investors are biting their nails, waiting to know the status of their deal hunt in New Zealand.

Six months into the negotiation process, the Canada Pension Plan Investment Board (‘CPPIB’) has to wait until March before the outcome of its bid for Auckland International Airport Ltd. (‘AIAL’) is known. This, despite the fact that CPPIB has made an adjustment to the deal structure, backing off from its initial intent to assume a controlling position in AIAL. CPPIB’s tenacious and accommodating disposition in its quest for AIAL is one of the most detailed, and yet somber, illustrations of the endless hurdles now facing private equity investors.

Even though New Zealand is one of the smallest economies on the globe, and welcomes foreign direct investment, the honeymoon with foreign buyout investors was brief. The first foreign group, outside of Australia, that had arrived at the doorsteps of New Zealand and had made a substantial commitment was the Australian arm of Japan’s Nikko Principal Investments (‘Nikko’). In 2006, Nikko committed NZ$165.0 million (US$111.0 million) to Hirequip New Zealand Ltd. The next major transaction undertaken by a foreign consortium took place in March 2007, when Canada’s Ontario Teachers’ Capital teamed up with CCMP Capital Asia for the New Zealand Yellow Pages deal which had a value of NZ$2.2 billion. The sparse number of deals that foreign investors have managed to complete in New Zealand underscores a rugged deal terrain that is home to the Kiwis.

It was in June when CPPIB was first known to be in discussion with certain shareholders in AIAL to obtain a controlling position in the target company. CPPIB’s NZ$3.10 per share offer price was soon rivalled by Dubai Aerospace Enterprise which was prepared to pay NZ$3.80 for each AIAL share. Despite the Middle East investors’ known expertise in infrastructure investments and rich coffers, the deal could not proceed following a chorus of disapproval from the public and politicians, suggesting that national assets such as AIAL should be kept in the hands of domestic and public investors.

Following a mutually agreed termination of discussions between AIAL and its Dubai-based suitor, CPPIB seized a new window of opportunity. In response to the voices of the public, CPPIB proposed an equity structure in which the public pension fund would take up a 40% stake in AIAL, paying NZ$3.6555 for each share. The deal is estimated to command a deployment of A$1.786 billion. The offer price is well above the company’s share valuation and falls within the range of between NZ$3.07 and NZ$3.48 each, according to an independent advisor’s report. Yet AIAL’s board cited the Canada-based public pension fund’s inability to bring “direct airport experience” as one of the principal reasons for recommending to its shareholders they reject the offer from the North American institution.

Before the end of December, AIAL disclosed it had entered into a confidentiality agreement with an international party which had expressed its interest to AIAL. Although such discussion is in parallel with CPPIB’s current offer to AIAL’s shareholders, the foreign investor gave clearance to AIAL to hold talks with another interested third party of investors .

In the meantime, it is a wrenching waiting time for CPPIB, as it sits in the Auckland airport lounge waiting for its chosen flight to take off.

Greater China Corner - Investments

The Makeover

Foreign private equity investors are making sea changes in Taiwan

Taiwan’s political isolation and turmoil has not deterred foreign private equity investors from seeking opportunities in the island. Ironically, it was one of the more attractive markets in 2007, capturing US$5.8 billion of commitments from private equity investors, an impressive 115% increase compared to that for 2006. With the arrival of foreign private equity investors, the island’s business community has been witnessing one of its most extensive facelifts, especially in the banking and cable TV sectors.

The Banking Sector

When TPG first committed NT$27 billion (US$844 million) in subscribing to Taishin Financial Holding Co., Ltd. (‘Taishin’) convertible notes in January 2006, it marked the launch of a growing list of foreign investors that likewise eager to be the creditors of the island’s banks. By the end of December 2007, three additional banks, EnTie Commercial Bank, Ta Chong Bank and Cosmos Bank, had also enlisted foreign parties to join their respective boardrooms. All financial investors moved swiftly to implement structural overhauls to strengthen their newly-acquired banking assets.

The New Bankers

The LongReach Group decided to recruit Mr Jesse Ding, former president of Fubon Bank, a prodigy in Taiwan’s banking and finance industry, to secure the EnTie Commercial Bank’s vault. His appointment attracted intense local media attention as he was reportedly receiving an annual remuneration of over NT$22 million, apparently a record for banking executives in Taiwan. Since taking the leadership position, a quarter of EnTie’s branch managers have been re-shuffled into new posts.

After having successfully gained the position as the largest shareholder of Ta Chong Bank, The Carlyle Group (‘Carlyle’) released the incumbent chairman from his duties and filled the vacancy with the departing chairman’s son, Mr Chen Chien-Ping. However, Carlyle also appointed Mr Gregory Zeluck as its eyes and ears in Ta Chong. He will assume the responsibilities as vice chairman of the bank. Mr Zeluck also holds the position as chairman of Eastern Broadcasting Co. Ltd. (‘Eastern Broadcasting’), in which Carlyle is a 40% shareholder. To further consolidate its position, even though Carlyle holds a 36% stake in Ta Chong, it will also take seven of the 13 board seats in the bank.

In Cosmos Bank, following the completion of the infusion of some US$900 million into the bank, Mr Simon Williams, a senior partner at SAC Private Capital Advisors, was anointed to manage the financially beleaguered bank.

Taishin Financial Holdings

TPG has chosen a different approach for its bank and finance assets in Taiwan. As a holder of convertible bonds in Taishin, TPG acted largely as a passive investor. However, after a 24-month investment holding period, the private equity firm is close to achieving its goal of becoming a shareholder of Chang Hwa Bank.

In 2005, Taishin beat all foreign parties and won the bid in taking a 22.5% stake in Chang Hwa Bank. It is currently engaged in a “shares swap” process with Chang Hwa Bank. When completed, Chang Hwa will be the wholly-owned subsidiary of Taishin. It is also a merger of convenience. In 2006, Taishin suffered a net loss of NT$36.5 billion brought on by its credit card unit. However Chang Hwa sailed through the credit card storm that enveloped Taiwan with a net income of NT$11.4 billion.

New Anchors

In Taiwan’s media industry, a new page was turned as financial investors are to steer two of the island’s principal television operating companies.

After years under the Koo family’s management, China Network Systems will soon have a new senior management team after inviting MBK Partners to become a 60% shareholder. Mr Nelson Chang, who had been at the helm of China Network Systems, will soon relinquish his responsibilities. According to local reports, at least 7 executives together with 18 managers from middle management have left the company. Mr Kuo-Chuan Kung, partner of MBK Partners, will become the steward of China Network Systems. Mr Li Yue-Cheng, former vice chairman of Taiwan Broadband Communications, is going to be appointed as a chief operating officer.

However, after making its second investment in Taiwan’s media industry, Carlyle faced little choice but to revamp the management of Eastern Multimedia Corp. (‘EMC’) which is now renamed as kbro Co. Ltd. This followed the demise of the Rebar Group which had been intertwined with the corporate journey and fortunes of EMC.

To lead kbro Co., Ltd. onto a new page, Carlyle has not only adopted a new name for EMC, but also appointed its own executives to head kbro Co., Ltd. as well as its sister affiliates. Between 2006 and 2007, Carlyle invested an aggregate US$1.5 billion for a 59.3% stake in kbro Co., Ltd., and a 40% stake in Eastern Broadcasting which is listed on the Taiwan Stock Exchange. In both, Carlyle has appointed its own men to be anchors.

Comments

Taiwan is poised for change. Its business community is counting on committed foreign investors, instead of its own government, to implement such painful changes. Once the most vibrant venture capital market in Asia, Taiwan is journeying on a makeover path that will lead it to private equity.