KGI buys Taishin Securities in Taiwan

KGI Securities has sealed a deal to buy Taishin Securities for NT$29 billion ($876 million) from Taishin Financial Holdings to consolidate its position in Taiwan's brokerage industry.

Taishin Financial is selling the brokerage business to improve its cash position and key ratios. As a result of the deal, its capital adequacy ratio will increase to 150% from 113% and its leverage ratio will fall to 95% from 127%.

In a statement announcing the deal, Taishin Financial said it may use some of the cash it realises from the sale to strengthen its banking interests overseas. Media has already been speculating that Taishin Financial is waiting for an opportune time to strengthen its ties with mainland China, especially as cross-strait relations have been improving recently.

Morgan Stanley was the adviser to Taishin on the deal. The process began as a negotiated deal and then became a competitive auction, said sources familiar with the transaction.

KGI will pay NT$28 billion in cash and issue NT$1 billion worth of shares to Taishin Financial. Lock-up details on the shares were not disclosed and nor was the reference price for the shares, said a specialist. However, the shares represent an equity stake of less than 5%. The price of NT$29 billion translates into a price-to-trailing 2008 book value of around 1.5 times.

Margins in the agency business in Taiwan have been under pressure due to the proliferation of players, especially small firms, sources said, and consolidation is being used as a means to build scale and restore profitability.

"The acquisition will help KGI boost its competitiveness in an increasingly difficult environment," KGI said in a written statement. On a combined basis KGI and Taishin Securities will have a market share of around 8.5%, according to sources.

KGI is majority-owned by Taiwan's Koo family which also owns another listed finance company, China Development Financial Holdings. China Development also has a brokerage unit, Grand Cathay Securities Corporation, which has a market share of around 3.5%.

Taishin Financial will buy a securities company to enable it to have the flexibility to offer a full suite of services to its corporate customers and "to serve the retail securities needs of its banking customers", the firm said in a written statement. Details of a non-compete agreement between the buyer and seller were not disclosed.

"The current deal is the largest M&A deal in the Taiwan securities market and the largest in the FIG [financial institutions group] sector since early 2008," said a source familiar with the transaction.

Investors in both Taishin Financial and KGI Securities welcomed the deal and shares of both companies gained almost 7% on the Taiwan Stock Exchange on Friday.