Fubon gets Taipei Bank

Round one goes to Fubon in the Taiwanese banking consolidation game as it snaps up Taipei Bank.

Fubon Financial Holding Company (FHC) has emerged victorious in its bid for Taipei Bank. It beat five other bidders for the deal, which was run through a transparent auction process by Taipei Bank's advisers, Goldman Sachs.

The acquisition will be made using Fubon stock, which will be exchanged for Taipei Bank shares. Fubon will offer a value of NT$35.5 for every Taipei Bank share and will use the 30 day average of its own stock for the exchange ratio. This equates to an exchange ratio of 1.12:1, which clearly favours Taipei Bank.

At this price, Fubon is paying of price of around 18 times this year's Taipei Bank earnings and a price to book ratio of 1.7. Salomon Smith Barney advised Fubon on the deal.

The fact that the deal is happening as a share swap looks slightly surprising. Bankers close to the deal report that Taipei Bank's biggest shareholder, the Taipei Municipal Government, requested from the start than any deal that happened would have to be done on a share swap basis.

Mayor Ma, who is from the ex-ruling KMT party, runs the government. He is seeking election in November this year. Some suggest that if he was seen selling the city's assets too cheaply it could damage his re-election chances.

As one observer close to the deal says, "The reason this is being done as a share swap is purely down to politics. They might say it is to do with regulations or tax or budgetary approvals, but it is really down to politics."

Fubon will issue new stock to pay for the acquisition, effectively diluting existing shareholders by 30%. After the deal closes the share structure of Fubon will be: The Tsai Family 31%; Taipei City Government 15.6%; Citigroup 11%; with remaining shares in free float.

The Taipei City Government will get two out of the eleven board seats on offer at Fubon. Observers will, therefore, be paying close attention to see if the dead hand of government shareholders and directors will start to have any affect on the company.

Fubon is widely regarded as the most pioneering, innovative and groundbreaking financial institution in Taiwan. It is the leading non-life insurer in the country; it has a decent securities business and a mid sized commercial banking arm. These three activities all contribute roughly the same amount of revenue into the company, unlike most other FHCs in Taiwan where one dominant business line tends to contribute most money.

Fubon was the first to formally turn itself into a financial holding company when the new law was passed in November 2001. It has also made the most progress in developing its cross selling skills - the central plank of any FHC strategy. According to Ng Wing-fai, group managing director of Fubon, the company now sells on average 2.7 products to each of its customers. Furthermore, 8% of its revenues are generated by cross selling activities.

With this deal, Fubon will be getting a bank with good assets, but most importantly, a very good customer base with which it can further its cross selling mission. The aim of this deal is to start selling these customers all the array of financial products in the Fubon stable.

Taipei Bank also runs the finances of the city government û a very lucrative business. It has an NPL rate of only 3% - less than half the industry average û as a result of the close links between its lending book and government. It also runs the Taiwanese national lottery, which last year brought the bank NT$1 billion in profit.

Furthermore the bank is run by Jesse Ding, widely respected in the industry as one of the best bankers around. He will become CEO of Fubon Bank within the group. The combination of his operational skills and the deal making skills of Daniel and Richard Tsai, should be formidable.

This deal will almost certainly spark off future rounds of consolidation in the industry. With 53 banks serving 22 million people, Taiwan is over banked. On top of its bid for Taipei Bank, Fubon has also been pursuing United World Chinese Commercial Bank (UWCCB), of which it now owns 15%. The other bidder for this is Cathay Financial Holdings. Given Fubon's success with Taipei Bank, Cathay looks certain to get UWCCB.

The Taipei Bank acquisition now needs to be approved at EGMs held in late September for both bank's sets of shareholders. If more than 66% of shareholders vote, there only needs to be a majority decision in favour, whereas if only 50% of shareholders vote then its needs to be a two thirds decision. As roughly 45% of the both banks have committed to the deal, it looks likely that it will pass. Final closure is scheduled for November.

Fubon is at present engaged in a share buy back programme. When the FHC law was passed it was envisaged that the FHCs would use cash to consolidate. Since then five FHCs have issued international convertible bonds raising over $2 billion. However the new finance minister, Lee Yung San, has reversed the policy and now demands that all mergers be done through share swaps, when a government bank is involved.

This curious decree appears to be designed so that career bureaucrats who have their sinecures in the banks, can maintain their power, positions and priviledges. The fact that Taiwan has a growing budget deficit to finance is apparently lost on Minister Lee.

So Fubon is using the proceeds of its bond issue as well as dividends up streamed from its subsidiaries to buy back its shares in the open markets. The effect of this buyback programme combined with the share swap for Taipei Bank actually equates to a very similar deal as if Fubon was buying Taipei Bank with cash.

Questions are bound to be raised over the price that Fubon is paying for the bank 1.7 times book looks reasonable on a regional basis, where the monstrosity of DBS' 3.2 times book value for Dao Heng still makes every other deal look cheap. However in Taiwan, no government linked bank trades above 1.5 times book. Moreover the 22% premium to the existing price of the shares that Fubon is paying seems a reasonable premium to pay for control.

However this deals really has to be seen in the light of the evolving strategy of Fubon. If in a few years, Taipei Bank's customers are all being insured by Fubon and invest in the stock market through Fubon, then this deal will be seen as an undoubted success.