As part of the same sale, Taiwan Mobile also divested its remaining 0.62% in the countryÆs largest telecom operator, bringing the total deal size to $958.8 million. Together the two vendors sold 5.96% of the company to international investors.
The government, which earlier in the day had sold a 1.27% stake in Chunghwa Telecom to domestic investors at a 5% discount to the local close, will hold 35.6% after this deal through the Ministry of Transport & Communications (MOTC) and will need to seek further approval from the legislature in order to cut its stake again.
The international sale comprised 56.4 million ADRs (each accounting for 10 common shares) which were sold through an accelerated bookbuild last Thursday (September 28). The MOTC sold 505.4 million shares while Taiwan Mobile, which has reduced its stake in Chunghwa Telecom from 1.55% over a two-month period through a series of market transactions, sold its remaining 5.9 million shares.
The price was fixed after the end of New York trading at $16.99 per ADR, which was equal to the closing price on the day. Joint bookrunners Goldman Sachs, Morgan Stanley and UBS provided no official price range but, according to market sources, they had indicated to investors that the deal would price tightly.
And so it did. Aside from the zero discount to the market, the existing ADRs also gained 0.47% in the final session before pricing compared with a decline in the underlying common shares. This saw the ADR premium widen to 4.4% over the locally traded shares, compared with an average premium of about 2% over the past couple of months.
Chunghwa Telecom's ADRs have always traded at a premium because demand for the companyÆs US-listed paper outstrips supply. But observers say the gain on the day may have been prompted by some market players being short the stock and trying to cover those positions as they realised the price would be tight and likely allocations wouldnÆt cover their exposure. Short-selling in the company's ADRs was very active leading up to this deal, according to market watchers.
In fact, there has been an overhang on the stock since early August when the government decided to re-do the bidding process for arrangers of the sell-down. This delayed the sale by about one month and resulted in the deal falling on the wrong side of the annual dividend payout, which had been regarded as a key reason to buy the placement.
ôWith the sell-down now completed and the overhang gone, people assume that the share price will do better and some players are likely buying on the back of that,ö says one observer.
The offer was just under six times covered with around 160 investors placing orders. About 60% of the buyers were new to the company, while existing investors û both global long-only and hedge funds û picked up the rest.
About 43% of the securities went to Asia-based accounts, while US investors bought 34% and European investors took about 23%.
The buying in the market also spilled over into Chungwha Telecom's Taiwan-listed shares which shot up 2.2% to NT$54.90 on Friday in the wake of the deal. Turnover soared to 87 million shares from a daily average of about 7.9 million shares over the previous 10 trading days. The stock added another 0.2% to NT$55 on Monday.
Despite these gains, however, the Taiwan-listed shares have fallen 7.9% since the beginning of August, primarily because the $4.30 cash dividend has been taken out of the equation. The stock is down 1.2% this year, compared with a 6.3% gain in the Taiwan benchmark index.
Aside from the ôtechnical buying" that characterised Thursday's share sale, some investors participated because they saw it as an opportunity to buy an otherwise illiquid stock in more sizeable portions. And while investors didnÆt get their hands on this yearÆs dividend, the fact that the company is expected to retain its high payout ratio helped to underpin the deal.
ôThe company still pays a 7% dividend which is among the highest in the (Taiwan) market and that makes it attractive,ö says one source. On top of that, there is talk that the company is about to carry out a sizeable capital management exercise which could result in yet more money being distributed to investors.
On the negative side, investors have been digesting a radical proposal by the new regulator, the NCC, that could remove restrictions on Chunghwa TelecomÆs market share in certain sectors. However, this is currently only under discussion and no major changes are expected during this year at least.
In a research note issued last week (prior to the sell-down), analysts at Macquarie Securities noted that the downside risk to their forecasts, which include a 12-month target price of NT$54.39, is growing ônot only from rising competition, but also from the new regulator, the NCC".
Analysts Dominic Grant and Tim Smart sum up their neutral position on the stock by saying: ôThe bull case lies in capital management, particularly share buybacks or capital reductions, while the opposing bear case is that competition, particularly wireless, will erode margins and hurt dividends, perhaps more rapidly than expected.ö
The auction of Chunghwa Telecom shares to domestic investors comprised 120 million shares at NT$51 per share, which compared with ThursdayÆs close of NT$53.70.
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