A block of shares in TPK Holding changed hands on Friday evening when German plastics component maker Balda returned to the market to offload just over half its remaining stake in the Taiwanese company that is the main supplier of touch screens to Apple. The bought deal amounted to NT$9.44 billion ($318 million) and accounted for 8.5% of the share capital.
Balda tried to sell a smaller portion of its shareholding in September last year, but was forced to cancel the deal a little more than one hour after the launch after it emerged that it had not made a required filing with the Taiwanese stock exchange in time.
Under Taiwanese regulations, when a shareholder that owns at least 10% of a company is planning to offload common shares, the company has to notify the stock exchange at least three days before the transaction. The company made the required filing around 5pm on Friday, taking advantage of the fact that the Taiwan market is closed today and tomorrow. This means that the deal could be done on Friday, but settled after the required three-day period while the stock market is still closed.
J.P. Morgan won the competitive bidding process for the deal and, according to sources, ended up buying the shares at NT$472 apiece. This translated into a 2.9% discount to Friday’s close of NT$486.
Balda announced the sale of the shares on its website in the early evening Hong Kong time, saying that it had sold 20 million shares and expected to generate proceeds of roughly €238 million ($320 million) based on Friday’s exchange rate. The sale will reduce its stake in TPK to 7.6% from 16.1% it said and added that its board of directors had reiterated its intention to also sell the remaining stake in the company “at optimum value”.
The company announced at the end of May that it intended to sell its TPK shares before the end of October and said on Friday that it views the investment as “a shareholding without strategic significance.”
Even with the Balda announcement, there was some confusion in the early evening as it didn’t appear as if J.P. Morgan had launched the trade to the market, suggesting that it may be sitting on $320 million of risk while the Taiwan market was closed for two days.
However, later in the evening it became clear that the bank had in fact placed the shares with a small number of accounts. A source said the bank didn’t send out a term sheet to the wider market as it didn’t see a need to do so. Aside from the fact that it knew a few investors who wanted to buy the stock, it was also approached by a number of investors during the afternoon after it became known that Balda was looking to revive the deal. As a result, it felt it had enough demand to carry out the deal without involving the broader investment community.
J.P. Morgan hasn’t disclosed at which price it sold the shares, but one source said it didn’t have to offer a wider discount than the 2.9% at which it bought the shares from Balda. While it seems unlikely that investors would have wanted to buy the shares at an even tighter discount ahead of a two-day holiday, it isn’t impossible. The source said the deal was tightly allocated, which suggests that investors treated the sale as a chance to buy a meaningful chunk of the company and put in quite large orders. If size was a key priority, they may have been willing to accept a tighter discount.
And while a potential sale of Balda’s remaining stake will continue to hang over the stock, TPK should benefit from the fact that this first sale is now out of the way. Despite a 30% gain so far this year, the share price is still 30% below where it traded when the German company tried to sell in September and has come off 47% from its record high in early May.
It is currently also trading below its IPO price of NT$574 in October 2010. Analysts do still like the stock, though, as evidenced by the fact that there are 16 “buys” and five “holds” on it, compared with just seven “sell” recommendations.
TPK, whose main production site is located in Xiamen in China, has grown rapidly since it was established in 2003, thanks to its partnership with Apple. TPK invented the so-called projected-capacitive touch technology and has worked with Apple to develop the touch screens for its iPhones and iPads. And even though there are competing technologies out there, analysts say TPK’s position as the market leader in the touch panel sector remains intact.
However, earnings have come under some pressure in the past year as the margins on the iPhone 4S have shrunk. When presenting the fourth-quarter results last week, the management said the operating margin could trend up by about 100bp in the first quarter this year due to synergies from vertical integration and an improved product mix in favour of the higher-margin iPad – even as revenues are expected to decline by 10% to 13%.
Balda's sell-down should also help improve the liquidity, although the stock is already fairly liquid with a trading volume of about $70 million per day.
The latter meant that the deal accounted for only just over four days of trading, which may have made J.P. Morgan more comfortable to take on the risk on a Friday before a long weekend.
Balda said in its statement that it plans to distribute part of the proceeds from the sale to shareholders via an extraordinary dividend. Balda’s representative on TPK’s board will resign following the sale.
Back in September Balda was aiming to sell 9.5 million shares at a price between NT$662 and NT$680. At the time, this was equal to a 2.4% to 5% discount versus the latest close. J.P. Morgan and Nomura were joint bookrunners.
