Oaktree's billion dollar swing

The US private equity firm announces a $1 billion bid for 100% of Fu Sheng, a Taiwanese manufacturer of golf club heads and compressors.
American private equity firm Oaktree Capital Management has announced a $1 billion deal in Taiwan, offering to acquire 100% of Fu Sheng Industrial, in concert with Fu Sheng's controlling shareholders.

Oaktree is offering NT$37.50 ($1.13) per share, which represents a premium of 15.7% over the average 30-day closing price of Fu Sheng shares on the Taiwan Stock Exchange and a price earnings multiple of 14.3 times 2006 earnings. Fu Sheng's main competitors trade around 12 times earnings. The price values the equity of Fu Sheng at NT$28.3 billion ($852 million). Including debt, the firm is valued at NT$33 billion.

The offer is contingent upon Oaktree acquiring 51% of the outstanding shares of Fu Sheng. Oaktree has already tied up most of this via an agreement with the founder and chairman of Fu Sheng, Lee Hou Teng, who will tender his 46.8% holding in the company. Of the remaining 52% of shares, 25% are owned by foreign firms including Templeton and Capital.

Lee, who founded the firm in 1953, describes the deal as: ôan opportunity to enhance Fu ShengÆs core business operations into a truly global company with an internationally recognised brand name, but firmly based in Taiwanö. Sources close to the deal say the transaction reflects Lee's desire to catapult the company onto a new platform.

Oaktree is conducting the offer through a newly established Taiwan company, Valiant International. Once the deal is done, Fu Sheng will merge into Valiant. The structure is complaint with Taiwan regulations for delisting. The Lee family will re-invest sale proceeds in a holding company which will own 100% equity in Valiant and, post transaction, the familyÆs equity interest is expected to remain at current levels.

Fu Sheng is the worldÆs largest manufacturer of golf club heads producing 15 million club heads annually across its manufacturing facilities in Taiwan, China and Vietnam. The company also manufactures industrial air compressors. China is the largest manufacturing base for the company for both golf heads and air compressors.

For calendar 2006, Fu Sheng registered combined revenues from both businesses of NT$25.7 billion. Of this, about 60% was derived from the golf business, 30% from air compressors and the balance from other businesses. Golf was slightly more profitable, contributing about 70% of profits. Both businesses are on a high-growth trajectory.

The golf industry is growing exponentially world over. In Asia, where it is an expensive sport to pursue, the growing numbers of rich have created a new pool of players.

"Almost ironically global warming has helped the industry in the western world as it has increased the duration of the year the sport can be played," says a banker, drawing attention to another reason for the increased sale of golf equipment.

The April issue of Golf Digest features Fu Sheng as it profiles how in a few short years since this beginning of this century, Asia, and specifically China, has become the dominant manufacturing base for golf clubs. It is estimated that 75% of all golf clubs sold annually are produced in Asia. In Taiwan Advanced International Multitech, O-TA Precision and Dynamic also manufacture golf club heads and all of them have significant factories in China.

The competitive advantage of Fu Sheng is not just cheaper manufacturing. It has R&D capabilities that are able to develop superior products which could well be "the next big thing" for the game. This R&D can also be leveraged to other applications.

In the air compressor business, Fu Sheng, which is a mid-sized player, could potentially acquire smaller firms and reach a critical mass as the industry is currently quite fragmented in the region.

Analysts have speculated that the privatisation of Fu Sheng could be a precursor to a move to separate the golf heads and air compressor businesses into separate companies. Sources close to the deal did not rule this out but said such ideas were too premature and were not driving the deal.

The Taiwanese stock market has become a scouting ground for a number of private equity funds as it is generally believed companies are getting severely discounted due to uncertainties in the country. Carlyle announced a bid for ASE in December which would have been the largest private equity deal in the country. But the deal was not pursued, and since then, ASE's share price has gained significantly.

Fu Sheng's shares have also risen recently. After the Oaktree deal was announced on May 9, the stock closed at NT$36.35.

JPMorgan advised Oaktree on the deal. Fu Sheng did not have a financial advisor.
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