FarEastone brings GDR

Taiwanese cellular operator paves the way for main board listing with $130 million deal.

FarEastone Telecom (FET), Taiwan's second largest cellular operator by number of subscribers, surprised the Asian equity markets yesterday (January 12) with a 7.33 million unit GDR offering. The deal was timed to take advantage of positive share price momentum following news that FET has purchased a 55.3% stake in telecommunications equipment designer Arcoa Communications.

However in the absence of a regulatory filing, the deal was also unexpected. Its accelerated passage to market was made possible because of considerable flowback to Taiwan from the group's debut GDR of June 2004. This meant that lead manager Goldman Sachs could simply re-issue units off the original programme.

The deal comprised an old share offering by the Far Eastern group, which divested a 2.9% stake and reduced its overall ownership to 49%. The deal was driven by its desire to move FET onto the main board of the Taiwan Stock Exchange and the application process is said to be a lot smoother if it owns less than 50%.

The transaction was marketed at a discount of up to 3% and fixed at this level. The 109.9 million share equivalent deal was priced at $17.74 per unit, which equates to NT$37.83 per share. This, in turn, represents a 3% discount to the group's NT$39 close, but a slimmer 2% discount to the VWAP.

News of the Aroca acquisition helped FET buck the downward trend of Wednesday's trading session on the TWSE and the stock rose 1% from its NT$38.60 close on Tuesday. Year-to-date it is up 1.3%, but has returned 63.28% on a one-year basis to trade at an all-time high. On a P/E basis, it is currently trading at just over 11 times 2005 earnings.

The stock's outperformance and the slim discount attached to the new deal ensured that the order book was relatively tight - achieving an oversubscription ratio of one-and-a-half times. Just under 30 investors are said to have participated in the transaction, which represents 25 days trading volume.

As a result of the new deal, the DR float is back up to about 10 million units again. Last June, the group raised $115 million from a 130 million share deal that was priced at a similar 3% discount to the stock's then close of NT$30.4.

Thanks to the GDR issue and the company's marketing efforts, analysts report that foreign ownership in FET doubled over the course of 2004, with QFII holdings rising from 5% to 10%.

Much of this superior performance derived from the group's success in maximising returns from its merger with KG Telecommunications earlier in the year. Together, the country's third (FET) and fourth (KGT) largest cellular companies were able to leapfrog the second (TCC) and create a combined entity with roughly 30 million subscribers.

Over the first nine months of 2004, FET was able to boost KGT's operating margins from 36.8% to 46.8%. It also practically doubled its pay-out ratio, putting FET on a par with both TCC and Chungwha Telecom.

This boosted the stock's dividend yield from the 3% area to 8.5% at present. In 2005, it has committed to pay out 80% of 2004 earnings, up from 46% in 2003. The maximum ratio is 87%.

Analysts consider FET one of the most defensive stocks in Taiwan and this is likely to have played well with investors at a time when tech stocks are still showing signs of weakness. However, in recent months many houses have switched to a more neutral view.

Some caution that earnings are likely to be hit over the second half of 2005 and 2006 by the launch of 3G. The likelihood that MNP (mobile number portability) will be introduced in the middle of the year also clouds the sector's earnings outlook.