Day 2 FinanceAsia Achievement Awards - equity and M&A

Best Equity Deal of the Year, Best Privatization, Best Secondary Offering

Korea Telecom, $2.242 billion

Morgan Stanley, UBS Warburg

In an exceptionally difficult year for Asian equity issuance, Korea has proved to be the market's saving grace, producing a consistent number of high profile, well executed transactions. Korea Telecom was the biggest of the lot and for both the lead managers and Korean government it presented a number of challenges, all of which were successfully overcome.

Chief of these was the government's obsession with making sure the deal priced at a premium to the underlying stock. For the leads, there was also the wider market to contend with and in particular negative global sentiment towards incumbent telcos.

What they achieved after the deal successfully priced in late June was the largest equity offering of 2001, the second largest deal to come out of Korea since Korea Telecom 1 and by default the largest follow-on offering from the Republic.

In terms of pricing, the Korean government went out of its way to try and stop the inevitable short-selling on the ADR, forcing every syndicate bank to sign a declaration whereby they committed not to short sell on their own account before the deal priced. Having averaged a 9% premium to underlying since the beginning of 2001, the outstanding ADR had nevertheless edged down to 5.5% by the middle of roadshows and most believed that it would be at parity to the underlying by the time the deal priced.

Crucially, however, it remained above parity to the stock's Won52,300 close allowing the leads to price the deal at a 0.35% premium to underlying. This meant that of the five secondary market government divestments since 1995, KT II managed to score the second lowest discount to ADR close and the second lowest premium compression from the beginning of roadshows to pricing. The only deal to have bettered it was Posco's $292 million offering of September 2000 led by Merrill Lynch and Salomon Smith Barney, which came at parity to close after premium compression of 1.6%.

Given the weakness if global equity markets, the leads had to pay careful attention to the way they positioned the company. They also had to contend with the fact that the stock had underperformed the domestic market since a failed domestic offering in February when the government had tried to sell a 14.7% stake, but only managed to secure a 1.1% participation rate.

Part of KT's problem also stemmed from stock overhang. The completion of the ADR went some way to solving this and the government also went of its way during roadshows to emphasize that it would take a flexible approach to its previous timetable of wanting to see the company completely privatized by June 2002.

For the Korean government, the success of KT II was a huge relief and saved it the embarrassment of its usual dilema of whether to price a national asset at a cheaper price to foreigners than local investors were able to buy it. More importantly, it injected considerable momentum into its privatization programme, paving the way for Korea Tobacco & Ginseng in the autumn and the far more difficult privatizations of Cho Hung Bank and Woori Financial Holdings towards the end of the year.

Special mention:

DBS Bank's $1.2 billion placement via Deutsche Bank. Just pipped to the post as best equity deal of the year and best secondary offering, the accelerated, underwritten bookbuild was a remarkable transaction on a number of fronts. It combined Deutsche Bank's willingness to commit the kind of capital most investment banks would baulk at and DBS's own ability to secure placement of $631 million stock to two US institutional investors. Deutsche Bank placed 19% of DBS' share capital (equivalent to a hefty 86 days trading volume) in 20 hours at a tight discount of 4.95% to the previous close. The transaction proceeded flawlessly from start to finish and drew nothing but praise from bankers across the region.

Best IPO of the Year

Petroleum Authority of Thailand, $726 million

Credit Suisse First Boston, Lehman Brothers, Merrill Lynch, Merrill Lynch Phatra, Siam Commercial Bank, Tisco Securities

At the beginning of 2001, few would have expected Thailand to produce one of the largest IPOs of the year. And certainly at the start of PTT's roadshows, no one, least of all the lead managers, thought that the transaction would prove such a smooth ride, with international books closing six times oversubscribed.

Generating international interest in Thai equity and kickstarting the moribund privatization programme were the Thaksin government's two key objectives. It managed to achieve both as investors started to move out of defensive markets and began to search for outperformance among the lesser MSCI-weighted indices.

Given that average daily trading volume on the SET has only ever been $120 million at best this year, selling out of such a large position would be difficult. The leads therefore argued that the presence of such accounts underlined renewed long-term interest in Thailand, rather than a view that PTT was a momentum trade on the back of huge retail demand. Where the latter was concerned, the government also successfully trod a difficult line between trying to appease unsatisfied local investors and bringing international equity investors back to the Kingdom.

The leads structured the deal so that it would appeal as both a defensive and growth stock. As such there were three main attractions for investors. Firstly, there were the defensive aspects of PTT's gas transmission business, which provides utility like returns. Upside came from the upstream business of PTTE&P in which PTT owns a 61% stake. Downside, on the other hand, was limited as the downstream operations had been written off in the valuation, leaving investors with a free option should the cycle turn.

PTT's success meant that the Thai government successfully cleared the country's largest privatization by a wide margin and its fourth largest equity offering behind the three, large post crisis, bank recapitalizations for Bangkok Bank, Thai Farmers Bank and Siam Commercial Bank.

As one observer concluded at the time, "The Thaksin government has pitched this deal perfectly. It didn't get too greedy when things started to go well and it has offered a compelling valuation. Institutional and retail investors will continue to chase the stock in the secondary market."

Lawyers which worked on the deal were: Allen & Overy; Skadden Arps; White & Case.

Best Equity-Linked Deal of the Year

Korea Tobacco & Ginseng, $244.13 million

Credit Suisse First Boston, UBS Warburg

In bringing Asia's first major equity offering since September it was imperative that the Korean government made its divestment of stock in KT&G a success and re-energise the region's lifeless primary markets. Originally the deal had been primed to begin roadshows on September 13 and after being held back for a month while the leads watched to see how the markets settled after September 11, the deal was bought back in mid-October with indicative terms unchanged.

The deal had an unusual structure made possible by KT&G's strong credit profile. Rather than use an exchangeable to sell its shares in the company, it was decided that the Korean government would launch a DR offering, while KT&G itself would use proceeds from a convertible in its own name to purchase additional underlying shares from the government. Representing the first combined convertible and equity privatization from Asia, the deal enabled the Korean government to divest a 20% stake.

The deal was marketed as the perfect defensive stock for a bear market environment. In the credit markets, the Korean bid had also remained strong, with the Republic of Korea's benchmark 2008 bond tightening down to nearly 100bp over Treasuries for the first time in its three-year history. Given that KT&G had never issued debt before, ran a net cash position and was constrained by the sovereign's Baa2/BBB sovereign ceiling, demand for the convertible was exceptionally strong. 

Indeed, books were closed two days into roadshows, with pricing settled at the tightest end of indicative terms with a 2% coupon, 18% conversion premium and yield-to-maturity of 125bp over Treasuries.

Timing and structure combined to make the deal a great success. As CSFB's Julian Hall commented at the time, "CB funds have been building up large cash positions over the last three to four months and are looking for equity participation at the moment. This deal has hit a sweet spot in the market and bringing it as part of a combined offering has also been extremely rewarding. Going deep into the equity and credit story during roadshows helped to further penetration of the CB universe, while the accelerated bookbuild of an equity-linked deal created additional momentum for the stock."

As of December 7, the deal also ranked as one of year's better performing equity-linked deals, trading at a bid price of 109.30%.

Lawyers that worked on the deal comprised: Cleary Gottleib, Steen & Hamilton; Shin & Kim; Simpson Thacher.

Special mention:

Acer Communications & Multimedia's $175 million convertible via Salomon Smith Barney. Taiwan has traditionally been the bedrock for equity-linked issuance out of Asia and ACM is clearly the standout transaction of the year. The deal was timed perfectly to take advantage of a marked supply/demand imbalance fuelled by global investor demand for equity-linked product and an increase in Asian redemptions. Heavily oversubscribed, the deal also moved the market on from the prevalent rolling put structures and used a two-year call and put structure, negating re-financing risk. Through the middle of the year, Taiwanese CBs were hit by falling stock markets, but by December the underlying market had recovered and ACM now stands as one of the region's best performing CBs, bid at 109.93% as of December 7.

Most Innovative Equity Deal

Singapore Telecommunications, $782 million

Merrill Lynch

In late September UK telecoms group Cable & Wireless sold a block of 834.912 million shares received as part payment for SingTel's acquisition of C&W Optus. What was highly unusual about the transaction was the fact that the sale date represented the final stage of a placement process that had actually begun back in June, when the lead had pre-placed the block with the Capital group of the US.

In what marked a first in Asia, Merrill's pre-placed the block subject to a number of conditionalities attached to the Optus acquisition, which would not formally close until September 17. It was a strategy that was applauded by ECM professionals. As one commented, "It was an enormously well executed transaction. Knowing that C&W had already monetized it stake for cash removed the overhang of its stake ahead of the closure of the M&A process."

Merrill's skill had been to find a solution for a client that had already been burnt by receiving shares rather than cash from an Asian M&A deal. A very sorry experience holding PCCW-HKT scrip a year earlier, consequently meant that Cable & Wireless was keen to complete a forward sale in SingTel and leave the end investor with the market risk for the company's share price between placement on June 15 and pricing on September 24.

In the end, however, the conservative stance led to a fairly neutral outcome since neither Cable & Wireless nor the Capital group gained or lost very much in the intervening period. Having traded at S$1.79 on June 15, the shares were only marginally lower at S$1.70 on September 24.

Best Small Cap IPO

HK$207 million IPO for Xinao Gas


This was the deal that marked the coming of age of ICEA, the highly successful joint venture investment bank owned by ICBC and Bank of East Asia.

The mandate for Xinao Gas was given to ICEA when ABN AMRO Rothschild had trouble getting the deal done. One month later on May 10, ICEA launched a HK$207 million deal that was five times subscribed. Part of the reason for ICEA's success on this and other deals is the firm's ability to place paper with rich Chinese in Shanghai and other mainland cities.

The deal was a massive success for all concerned. Since listing it is up 121.7%, making it one of the best performing IPOs of the year.

Best M&A Deal of the Year, Best Cross-border M&A Deal of the Year

Emerson's $750 million acquisition of Avansys Power from Huawei Technologies

CICC, Morgan Stanley, JPMorgan

This was not the biggest M&A deal of the year. Indeed, it was considerably smaller than SingTel's acquisition of Optus, for example. However, its significance will be remembered decades from now in a way that the SingTel Optus deal will not.

Announced just after the 9/11 tragedy, the significance of this deal was missed by many observers. However, it will be remembered as the first post-WTO M&A transaction to come out of China, and also points to the fact that Chinese companies - unlike many in Asia - have already grasped the concept of core competencies.

The deal was first mooted in October 2000, with Emerson's outgoing CEO Chuck Knight keen to do a deal in China, and cement his legacy. Emerson is the biggest player in manufacturing telecom power equipment and Huawei - probably the biggest unlisted private sector company in China - had created a good Chinese power equipment business via Avansys. Avansys provides telecom and data network power conversion products to Huawei and China Telecom customers. 

However, Huawei had realized that Avansys was a non-core business, with its main business being selling telecoms equipment throughout China. It is reckoned to be the lowest cost manufacturer in the world, and has a number of patented technologies that make it one of the most exciting corporates in the PRC. It is keen to expand its business throughout China and beyond, and thus was looking for cash.

The M&A route - selling a non-core, yet successful business - offered the perfect opportunity and Huawei engaged Morgan Stanley to represent it.

Emerson engaged CICC and JPMorgan, and saw a great opportunity both to build a partnership with the thriving Huawei group - which will continue to be one of its biggest customers in China - and gain a low cost production base for its product globally.

In doing the deal, Emerson has done the largest ever acquisition of a private sector company in China, and achieved a feat that even two years ago would have been considered beyond the realms of the imagination. In M&A terms it is every bit as much of a landmark as the privatizations of China Mobile, and PetroChina.

Such landmark deals are never straightforward. Although, Huawei and Emerson agreed on a price and structure relatively quickly that was only the first hurdle. What then slowed things down was an approval process that reflected just what a landmark this deal was. By the end of the process there were so many chops on the cover of the offer document that the white paper had become red.

Credit must be given where credit is due at this point. In spite of having the most reticent PR of any major financial institution in Asia, CICC deserves the plaudits for making sure this deal happened. CICC is uniquely positioned to navigate the Chinese political scene, and in this deal that was obviously the key thing. It made sure that sign offs were gained from figures and institutions that went right to the top (yes, the very top).

What has resulted is a definitive win/win situation for all concerned. It promises to be a benchmark for future deals and has laid the groundwork for an M&A approval process in China. All those involved on this deal deserve to be congratulated not only for structuring a perfect transaction, but also in forging new and valuable ground in Chinese M&A, which 10 years from now is likely to be one of the biggest M&A markets in the world.

The lawyers too deserve credit. For Huawei they were Shearman & Sterling and PRC lawyers, Haiwen & Partners, while Emerson was represented by Perkins Coie .

Best Domestic M&A Deal

OCBC's $2.9 billion acquisition of Keppel Capital

UBS Warburg, JPMorgan, Salomon Smith Barney

Where do the plaudits end for this $2.9 billion deal? Not only was it Singapore's first major unsolicited offer, it involved a triple-currency bond issue to finance it. And it proved the catalytic start of the long-awaited consolidation in the Singapore banking sector.

Indeed, this was a transaction that was planned with all the thoroughness of a military invasion. In the small, clubby world of Singapore, all concerned knew that an unsolicited bid would ruffle many feathers, and that the strategy had to be exactly right. Immediately following the announcement, DSB then launched a hostile bid for OUB, and the rest as they say, is history.
While the merger of UOB and OUB has created the largest banking entity in Singapore, it is our belief that the overall execution and catalytic quality of OCBC's bid for Keppel deserves to be remembered as the defining M&A trend of the year, just as PCCW s takeover of HKT indelibly was for 2000.

The Singaporean bank also scored a hat trick in the subordinated debt markets launching Asia's largest bank capital deal to date and the third largest bond deal on record from Asia. Proceeds were used to fund the acquisition and the bank and its advisor UBS Warburg won numerous plaudits for executing a triple currency deal under an extremely aggressive timeframe, with ratings, roadshows and pricing of the dollar tranche all completed within 17 days of the announcement of the acquisition.

Booking proceeds ahead of possible new deals for either DBS or UOB left OCBC in the enviable position of having financed itself ahead of a glut of Singaporean bank transactions and cushioned its capital ratios against the impact of the S$4.8 billion ($2.9 billion) acquisition. "We had until August 3 to get the funds in place and we also knew that PCCW-HKT was coming with its jumbo bond deal," Paddy O'Brien co-head of Asian debt capital markets commented at the time. "We wanted to get in first and OCBC pushed us hard with a very tight timeframe."

If  the  acquisition had fallen through, OCBC also included a novel make-whole provision giving OCBC an option to call the bonds during a window between September 30 and December 10.

The structure of the deal was very much the work of OCBC's CFO Chris Matten, widely considered one of the world's foremost bank capital experts. The speed with which he had got OCBC rated and ready to execute a capital markets transaction may well be an Asian record.

The deal also gained the approval of the markets. In most cases Singaporean entities that announce M&A transactions see their share price fall. When OCBC announced its intentions for Keppel Capital (advised by JPMorgan, with Salomon advising the parent Keppel Corp), the share price actually went up (by around 15% in one week). The analyst community were heartened to hear OCBC executives say they were "determined to do a deal, but not desperate". 

Secrecy was the order of the day, and the fact that the deal was announced on June 12 without a single leak is a testimony to the professionalism and integrity of all those involved - an especial achievement given there were scores of lawyers, bankers and accountants preparing the 10b5 opinion for the bond offering in the preceding weeks.

If any news of the deal had leaked, Keppel's counter would have been suspended. The sheer surprise floored everyone. As a Merrill Lynch analyst wrote the Monday after, "We believe that this unsolicited offer will create a permanent change in the Singapore banking scene. It sets the stage for acceleration of the long-awaited domestic consolidation, which should in the longer term create a healthier banking sector."

Immediately on announcing the deal, OCBC management set off on a punishing routine of roadshows, first with equity shareholders and then with bond fund managers. Things became easier when DBS went hostile for OUB and drew UOB into a bidding war. This eliminated the potential for a second bidder for Keppel and left OCBC happy to have planned so thoroughly, taken so much sub-debt out of the market, and generally speaking set the pace.

Indeed, by taking so much sub-debt out of the market, the bank appeared to have made it impossible for any other Singapore bank to match its all-cash bid.

The unsolicited nature of the offer was soon turned 180 degrees when the key shareholders of Keppel Capital (Keppel Corp, AIB and Temasek) all agreed to an irrevocable undertaking after OCBC raised its price by 8%. 

Some have questioned why OCBC raised its price. Yet from a valuation perspective, it had gone in with a low bid (1.7 times book) with the expectation that it would have to bid again, to top another bank s offer. It had thus left itself quite a lot of slack, and the 8% increase was cheap considering the certainty it brought to the deal.  Moreover it equated to a price to book of 1.86, which when put in perspective was better value than DBS s acquisition of Dao Heng in Hong Kong (3.3 times book).

In the event, thanks to the irrevocable, OCBC received 98% acceptances.

Moreover this deal was done without diluting existing shareholders (thanks to the sub debt) and saw the bank come out of the transaction with a more efficient capital structure than when it went in.

And thanks to this deal, the Singapore banking sector has taken its first step towards the consolidation that will make its banks able to resist foreign competition and expand abroad. For that reason alone, this was a truly transformational deal.

The lawyers were Allen & Gledhill (domestic M&A council), Shearman & Sterling Stamford (adviser to Keppel Holdings financial advisor, Salomon), and Simpson Thacher & Bartlett (issuer's council) and Clifford Chance (underwriter's council).

Most Innovative M&A Deal

The restructuring of PT Telkom and Indosat

Credit Suisse First Boston, Danareksa, Salomon Smith Barney

Considering what a turgid year 2001 has been, it is something of a surprise that we feel so able to use the horrible banker phrase 'win-win situation' about so many deals. This is a classic example.

In this innovative deal, CSFB, Danareksa and Salomon were able to totally restructure the entire Indonesian telecoms industry and make it a brighter spot for investors, both domestically and internationally.

The deal involved Indosat gaining control of the number two cellular company Satelindo, while Telkom gained control of number one cellular company Telkomsel - a company which is growing subscribers by 80% per year. As a result of the deal both companies were re-rated by analysts, and unlocked value in the cellular phone area that was previously hidden by their cross-shareholding structure. It also created two dominant competitors in the Indonesian telecoms sector, improved Indosat's debt position, and saw it take control of former Bambang Suharto company, Bimagraha. 

The deal's structure was not simple, and it was vital to get Bimagraha on board. Briefly, Telkom bought Indosat's 35% stake in Telkomsel for $945 million, gaining 78% of the mobile operator and full control. Meanwhile, Telkom sold Indosat a 22.5% stake in Satelindo for $186 million, and fixed line phone assets in Central Java for $375 million. It also allowed Indosat to take its stake in Lintasarta, a leading player in the data communications market, up to 70%. In total, Indosat emerged from this unwinding exercise with $346 million of cash.

Indosat then announced it would buy 70% of Bimagraha for $260 million and thus gain an effective 31.5% stake in Satelindo. Together with the stake bought from Telkom that took Indosat's control of Satelindo above 50%.

The deal has thus created two consolidated telecoms companies each owning a rapidly growing mobile phone business. For Indosat this will help offset falling margins in its dominant IDD business, and with the (still to be completed) acquisition in Central Java, allow it to target new customers.

For Telkom, it has allowed it to gain full control of Indonesia top mobile phone company, and this is certain to see a re-rating of its stock. Amazingly, it is one of the cheapest companies in the world, trading at 4.5 times 2001 cashflow. The Telkomsel acquisition looks certain to see its stock price move closer to international comparables.

Indonesia's mobile phone market is an exceptional cash-cow - which is very unlike the situation elsewhere in the world. 3G costs are not being incurred as the market is still at a basic level. But demand for such basic services has been growing fast. Telkomsel is the jewel in the crown of PT Telkom now, and Salomon Smith Barney followed the restructuring by bringing SingTel in as a 22% strategic shareholder (replacing the heavily indebted KPN). 

Thanks to the new improved corporate structure, the Indonesian government was later able to sell down 12% of its stake in PT Telkom for $300 million. Just under 50% of the placement went to investors who hadn't bought anything in Indonesia since the 1997 crisis. That fact alone testifies to what a significant, confidence restoring deal this was for Indonesia Inc.

Salomon Smith Barney research forecasts there will be 16 million mobile users (out of a population of 207 million) by 2005. So there is a lot of potential for both Telkomsel and Satelindo to grow.

Telkomsel has very good cashflow and is the number one player in Indonesia. Satelindo's growth has been restrained only by its limited ability to commit capital expenditure thanks to agreements made in its debt restructuring. It has a net debt position of $450 million, and some of the cash thrown off by this deal could be used to pay down some of the debt and thus improve the debt's market price.

Telkom was advised by Salomon Smith Barney, and Indosat was advised by Danareksa and Credit Suisse First Boston (which also advised Satelindo on its debt restructuring). 

Telkom went into the deal with by far the stronger balance sheet, sitting on a net cash position of $800 million. The price it paid for Telkomsel equated to $1500 per year-end 2000 subscribers. Comparable Asian companies trade at $1400 per year-end 2000 subscribers. 

Where CSFB and Danareksa have clearly done a good job is in making certain their client, Indosat, paid exactly the same valuation to Bimagraha as it did to Telkom - valuing the company at $825 million (excluding debt).

Why? Well, in the case of Telkom it was only buying 22% and not gaining control. The Bimagraha stake, on the other hand, included all sorts of covenants that gave it effective management control. The fact that a higher price was not paid for this stake - previously controlled by Bambang Suharto - is a sign that the advisers struck a very good deal indeed, and also that Suharto influence is definitively on the wane.

The government currently holds 65% in Indosat and 54% in Telkom. The government plans to dilute its stake in Indosat over the next year. Thus, this reorganization will also prove a massive add

The deal's total value - from a league table perspective - was $1.5 billion. But Salomon has since done further work, buying out foreign players from the messy KSO structure that was created in the Suharto era. So far it has bought out Cable & Wireless and is close to deals with France Telecom and SingTel.

The lawyers were Skadden Arps and HHP for Telkom and Clifford Chance and MKK for Indosat.




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