In a deal that has been in the works for almost 12 months, the Koos family finally decided their strategy of going it alone in the telecom sector was no longer viable. With Far Eastone's acquisition of KG Telecom - which was announced yesterday - the Koos family will retain around 10% in the new enlarged entity, but will lose control.
The deal will see the controlling Far Eastern Group of Far EasTone hold 40% of the new entity, NTT Docomo 5%, and AT&T 16%. The remainder will be held by public shareholders.
The new entity will have 7.7 million subscribers, putting it behind Chunghwa Telecom but on a par with Taiwan Cellular. The consolidation will thus lead to three operators carving up the Taiwan mobile market, with the new Far EasTone being second placed by revenues.
The deal makes a lot of sense.
KG Telecom had been the weakest of the local operators, but thanks to an alliance with NTT Docomo and some savvy management it had turned its performance round recently. Eight months ago it launched the Docomo imode service and in the past year had grown its bottom line by about 10%.
In that sense - with some momentum behind it - the Koos and their advisor, ABN AMRO were able to negotiate from a position of greater strength than in previous times. However, it always seemed likely that the Koos would have to bite the bullet and merge with someone as KGT did not have a 3G license. Far EasTone does.
Accordingly the deal has been done on a valuation that is six times KGT's 2003 EBITDA; which indicates a decent control premium is being paid, given Far EasTone trades at 4.9 times. The deal is being financed in stock as well as with NT$11.9 billion of cash.
This will be financed partly using internal cashflow, but also through debt - both domestic and international. The new combined entity - with its stronger market position - should find it easier to raise new debt and refinance old, and this is considered to be one of the synergies behind the deal.
The total debt of the two groups (which will be refinanced) is around $800 million. The new company has an enterprise value of NT$117 ($3.4 billion) versus KGT's equity value of NT$31 billion.
It will be interesting to see whether this Taiwan transaction will be a catalyst for something similar to happen in Hong Kong, where many have predicted there should be consolidation in the mobile sector. Like Taiwan, Hong Kong's operators would benefit greatly from a consolidation to three operators. There are currently six, and this frequently leads to some of the most insane price wars in the global cellular market.
Advisers on this transaction will hope some of the families in Hong Kong draw the same lessons as both parties in this deal. Far EasTone was advised by Goldman Sachs and as previously stated, ABN AMRO advised the Koos family of KGT.
