FarEasTone mandates ADR

Taiwan''s fourth largest wireless operator has selected lead managers for a prospective $500 million to $600 million ADR.

Goldman Sachs and Merrill Lynch have won bake-offs to lead the transaction, which is provisionally being scheduled for launch in the autumn. Five banks that made the shortlist became four last week when Morgan Stanley Dean Witter decided not to attend bake-offs, leaving Credit Suisse First Boston and UBS Warburg as the two also-rans.

The appointment of the two US investment banks comes as no surprise, however, since both are considered the respective house banks of FarEasTone's two major shareholders, Far Eastern Textiles (Goldman) and AT&T Wireless (Merrills).

FarEasTone is planning to use proceeds from the deal to fund its 3G bid and is currently in the process of completing an OTC listing. The company had hoped to list domestically by the end of April, but Taipei-based bankers say that it is now looking more like late May/early June. Last week, for example, the accounting board of the SFC asked FarEasTone to review certain accounting policies prior to final approval of the listing.

Led by Capital Securities, the domestic deal is said to comprise 10 million old shares, with Taiwan Cellular (TCC) likely to provide the most comparable pricing benchmark. Taiwan's second largest wireless operator also has an OTC listing and is said to be trading on an EV/EBITDA multiple of 7.5 times FY01 earnings and at an EV per subscriber of $8.10, both below the regional average.

With lower subscriber numbers and lower EBITDA margins than TCC, bankers say that FarEasTone should be priced at a discount. "Chunghwa probably still has the highest EBITDA margins but they are difficult to pinpoint, because the company doesn't break its figures down by division," says one analyst. "TCC comes out at a 36.4% level, while FarEasTone is probably around the 22.5% mark."

Local bankers say that TCC's own plans to raise ADR funds encompass a 330 million share issue at a current target price of roughly NT$72 ($2.20) per share, raising approximately $700 million. Salomon Smith Barney is lead manager.

For either company to seek an ADR listing, however, Taiwan stills needs to deregulate foreign ownership limits, as both have filled their 20% quotas. "The increase to 40% will happen at some point during the second half, but it needs to be passed through the Legislature first and this is not a speedy process," the analyst adds.

But the key question for many investors will be the cost and number of 3G licenses to be awarded by Taiwan. A report prepared by Nomura in February is now sitting with the Directorate General of Telecommunications, which is said to be likely to publish its findings in June in advance of formal auctions at the end of the year.

Recently released results for 2000 showed a 147% increase in net profits to NT$4 billion ($123 million) on the back of NT$32.2 billion in sales.