Far EasTone debuts in DR market

Taiwanese cellular company completes debut GDR.

Far EasTone (FET) raised $115 million yesterday (Tuesday) after pricing a 130 million share deal at a relatively aggressive 3% discount to a spot close of NT$30.4.

Goldman Sachs led the secondary share offering, which was designed to increase the company's freefloat following its recent acquisition of KG Telecommunications, the country's fourth largest cellular operator. The company offered 8.7 million GDRs pre shoe, with a ratio of 15 shares per unit.

The company has been in pre-marketing since last week and was scheduled to embark on a one-week roadshow today. However, the lead decided to take advantage of a stronger market tone and the deal was accelerated, with roadshows now just spanning Asia over Wednesday and Thursday.

Books were opened at the beginning of Asia's trading on Tuesday and were covered within two hours. The deal was marketed on a range of up to a 5% discount to spot, but was five times covered at the 3% level, with participation by 50 accounts. In the past, most debut GDRs from Taiwan needed far higher discounts because of the length of time they took to become fungible.

Over the past year, discounts have become ever tighter, but FET's deal was particularly impressive in the context of a stock, which has risen 20.16% year-to-date and has traded up from NT$29 level at the end of last week. Like Shin Kong Financial, which issued a convertible bond last week, FET is not well covered by analysts and previously had a QFI holding of only 1.5%.

The new deal represents 4.6% of the company's issued share capital and will bring the freefloat to almost 20% from a pre-deal level of roughly 15%. Pre greenshoe, Far Eastern Textiles owned 52%, the Koo's group about 10% and DoCoMo about 5%.

Investors are said to have liked the stock because it is low beta and defensive in the context of the heavy tech weighting of most Taiwanese portfolios. Given the high penetration rates in Taiwan, all three of the major cellular plays - Chunghwa Telecom, TCC and FET - are considered mature businesses and payment of a cash dividend is a high priority for investors.

As a result, FET has agreed to increase its pay-out ratio from just under 50% to between 70% and 80% of net income for 2004. It is currently running a dividend yield of about 3.7%, which is below both TCC (5.2%) and Chunghwa Telecom (7.9%).

It has also pledged to maintain an EBITDA margin of over 40%. At the end of 2003, it stood at 45%. As a result of its merger with KGT, FET expects to achieve cost savings of about NT$3 billion to NT$5 billion over the next two years. At the end of 2003, net income amounted to NT$7.5 billion.

All three of the cellular operators are currently trading at roughly the same P/E ratios of 10 to 12 times 2004 earnings (depending on which analysts you speak to). FET hopes its merger with KGT will give it a springboard to leapfrog TCC, which has traditionally been the second largest cellular operator in Taiwan. At the end of the first quarter, FET is said to have reported a revenue market share of 32.5% compared to 28.9% for TCC.