Delay of Chunghwa Telecom sell-down suggests dull ECM month ahead

Taiwan's Ministry of Finance decides bidding process for bookrunning mandates must take minimum 28 days under government procurement laws; this pushes the $1 billion-plus share sale into September at the earliest.
August looks set to be a fairly dull month in the Asian equity capital markets after the one sizeable deal that was expected to spice up the pipeline has been called off.

A spokesperson for Chunghwa Telecommunications confirmed Monday (July 31) that the Taiwan governmentÆs second sell-down of the telecom operator in 12 months will be delayed after the Ministry of Finance decided that a formal 28-day bidding period must be adhered to before the bookrunning mandates can be awarded. The mandates were initially expected to be announced last week.

This means the share sale, which based on the current share price was expected to raise up to $1.3 billion, can no longer take place before the stock goes ex-dividend on August 10 and consequently one of the main selling points of the offer will be lost.

ôThe key positive of this story for investors is the fact that you will get access to a dividend yield of about 8% - thatÆs why the ex-dividend date is so crucial,ö says one banker, noting that it doesnÆt matter that the shares will become cheaper after the dividend is taken out.

ôAlthough the share price will adjust downwards (after the ex-dividend date), the potential upside will then be much more long-term. You will not be able to make that quick 8% return in a matter of days,ö he argues.

Last year when the government offloaded a 17% stake in the company, which brought its holdings below 50% for the first time, the sale was also done a few days before the stock went ex-dividend.

Chunghwa Telecom is due to pay a dividend of NT$4.30 per share in cash and NT$0.2 per share in scrip, which compares with a share price of NT$60.3 as of yesterday and an average trading price of NT$58.7 over the past 12 months.

At the end of last week, it was still unclear whether the Ministry of Finance û which got involved after the banks had already submitted their bids - would imply a strict interpretation of the countryÆs procurement laws in this case. Technically, Chunghwa Telecom is no longer a publicly-controlled company as the government owns only 41.5% and the Ministry of Transport & Communication (MOTC), which holds the shares on behalf of the government, clearly didnÆt see a need for such a cumbersome process since the original RFPs gave banks about one week to reply.

Both bankers and representatives for Chunghwa Telecom said on Friday there was still a chance that the mandates would be awarded based on responses to those RFPs.

That hope was shattered over the weekend as according to Fu-fu Shen, director of investor relations at Chunghwa Telecom, the company was told it will have to follow the procurement laws as the government is still its biggest shareholder.

ôThe whole process has to be redone,ö Shen says.

While it is still unclear when that will happen, the minimum 28 days that the mandates will have to be up for bidding means the market is now looking at a September deal at the earliest.

However, Shen noted that with the opportunity to sell shares before the ex-dividend date now gone, there is ôno need to hurry.ö Indeed, the government could now wait until later in the year in the hope that the secondary market will stabilise further as it has until the end of December to complete the sale.

According to an earlier announcement, the government and Taiwan Mobile are looking to jointly sell up to 750 million shares in the company. Taiwan Mobile currently holds only 1.55%, which means the great majority of those shares will come from the MOTC. The combined sale will account for about 7.8% of Chunghwa TelecomÆs outstanding share capital.

Most of the shares are expected to be sold to international investors in the form of American Depositary Shares, although the final split has yet to be decided. Last year, about 82% of the $3.1 billion issue went to international investors.

As a result of the dividend falling out of the share price, the total size of the government share sale will be smaller (assuming the number of shares remain unchanged), and according to bankers it is likely that the discount to the market price will also have to be greater to account for the reduced possibility of a ôquick return.ö

This means less revenue for the underwriting banks at a time when fees are already under downward pressure. Given the severe competition for the mandates, a number of investment banks are believed to have been willing to accept very low fees in the hope of being able to replace one of the three banks which arranged last yearÆs offering.

According to market sources, 10 to 12 investment banks were believed to have submitted a proposal to Chunghwa Telecom by the original July 20 deadline. And while Goldman Sachs, Morgan Stanley and UBS were previously widely considered to be the front-runners based on the fact that they handled last yearÆs sale, the decision to use a formal government procurement process has thrown the final outcome wide-open again.

Chunghwa Telecom was expected to be the only $1 billion-plus deal to hit the market in August, which is traditionally a quiet month due to the fact that a majority of fund managers tend to go on holidays during this period.

Last year was an exception with a number of sizeable deals hitting the market in August, including the Chunghwa Telecom deal, a $1.03 billion sell-down of SK Telecom shares by SK Corp and a joint sale of $1.3 billion worth of shares in TSMC by Royal Philips Electronics and the Taiwan Development Fund.

However, given that the secondary markets remain very volatile after the correction in May and June and investors are still requiring pretty generous valuations in order to commit money, and bankers see little reason to tempt fate with deals larger than a few hundred million dollars.

ôEverybody has gone done to second gear,ö says one banker, while noting that September and October promises to be very busy based on the current pipelines.

Tech Mahindra, an Indian provider of IT services to the telecom industry, is currently on the road with an IPO which aims to raise up to $100 million with the help of ABN AMRO Rothschild and Kotak Mahindra, and on Monday (July 31) another Indian company - GMR Infrastructure - started the five-day bookbuilding for its $171 million to $204 million domestic IPO, which is led by DSP Merrill, Enam, JM Morgan Stanley and SSKI.

Also on Monday, Singapore real estate investment trust CapitaCommercial Trust launched a roadshow for an S$800 million ($500 million) follow-on offering to finance its acquisition of a 60% stake in Raffles City. The actual sale, of which parent company CapitaLand will buy at least S$300 million, will take place around the middle of the month through an accelerated bookbuilding arranged by HSBC and UBS.

Otherwise it is pretty quiet. China-based Actions Semiconductor has made an SEC filing to issue an additional 12 million ADS backed by existing shares through Citigroup and Morgan Stanley. However, the Nasdaq-listed fabless chipmaker has yet to decide on the time table. Based on the current share price, the deal could raise up to $90 million.

China Merchants Bank is also looking to start pre-marketing for its H-share IPO towards the end of the month, although the actual bookbuilding wonÆt take place until mid-September. The mainland lender, which already has an A-share listing in Shanghai, is hoping to raise up to $2 billion with CICC, JPMorgan and UBS as the bookrunners.
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