Share sale sees Citi unwind Fubon partnership

A once vaunted partnership is dissolved as Citigroup divests the majority of its stake in Taiwan''s Fubon Financial.

Citigroup went some way to removing a six-month overhang in Fubon Financial late last week when it sold a 5.36% stake in the financial services group. The US banking giant raised $399.6 million from the sale, which has been flagged to the market since June when it formally announced the end of its strategic partnership.

Citi sold 40 million GDR's at $9.99 per unit. One GDR equals 10 common shares.

This represented a 4.5% discount to the stock's NT$34 close on Thursday and the outer end of a 3% to 5% marketed range. Initially the deal was sized at $300 million, but upsized to $400 million midway through the night on Thursday. Books were finally closed just before the market re-opened on Friday, with the lead retaining an option to sell a further 12 million units raising an additional $119.9 million.

If the greenshoe is exercised, Citi will have sold 6.97% of Fubon's issued share capital, leaving it with a residual 2.93% stake. US management is said to be keen to retain this, believing the stock has considerable upside thanks to the removal of the overhang.

Prior to the deal, Citi owned 9.9% of Fubon and is said to have been consistently dribbling stock into the market over the past last six months in order to get below 10% - the threshold above which it would have been required to make a public filing before it launched an equity deal. When the two formally announced the end of their partnership, Citi held 10.47%.

At the time Fubon hoped it might be able to buy back some, if not all, of the shares itself. However, management soon realised they would fall foul of Taiwan's strict laws governing share buy-backs.

Officials say the group was able to meet all of the government's criteria bar one - that risk based capital must be over 300%. Currently no Taiwanese FHC (Financial Holding Company) has a ratio above 250%.

Instead, the new equity deal brings 70 accounts to the stock, although a large number were said to have been topping up existing positions. The order book closed one-and-a-half times covered and saw 59% of the deal placed with long-only funds, 38% with hedge funds and 3% with private banking clients.

By geography about 60% went to global funds, 15% to Asia-dedicated funds, 15% to European funds and 10% to US funds.

The deal represented about 24 days trading volume and this may partly explain why the discount was slightly larger than the 3.8% achieved Cathay Financial the week before. The latter raised $495 million from a GDR, which represented 12 days trading volume.

In the day after pricing, Fubon fell to NT$33, although it did not break through the level of the new deal, which equated to NT$32.47. Year-to-date, the stock is now up 1.5%.

At the time Citigroup made its original investment in 2000, it paid NT$22 billion (then worth $750 million) for a 15% stake. This was subsequently diluted when Fubon raised new equity in 2002.

Both partners hoped that in time they would be able extend their strategic partnership further and merge Fubon's banking operations with those of Citbank Taiwan. This would have enabled the combined entity to break through the magic 10% marker for market share in the country's notoriously fragmented banking sector.

But it never happened and local observers believe the key sticking point was control.

Both sides wanted to create an integrated financial services giant, with an emphasis on cross-selling. However, whereas Citi was looking to gain eventual management control of Fubon, the Tsai family who currently own it, were hoping to do the exact opposite. They wanted to create their own version of Citi - using the latter's expertise as a springboard for their ambitious expansion plans across Asia and particularly Greater China.

Following the acquisition of Hong Kong's IBA, banking now accounts for about 60% of Fubon's total revenue. In the nine months to September the group as a whole made NT$12.4 billion in net income, about 77% of its 2004 target.

The stock is currently trading at around 1.6 times book value, below the 1.8 times median multiple of Taiwanese banks with a market cap above $1 billion. Chinatrust, for example, is trading at 2.2 times, although it is also returning 19% on equity versus 12% for Fubon.

Fubon, on the other hand, is currently trading on a forward dividend yield of 5.45%, whereas Chinatrust stands at 3.6%. Some analysts have wondered whether Fubon will pay a special dividend given that it is so heavily overcapitalised at the group level - 186%.

But management say Taiwan's stringent regulations currently prevent this. Instead, the group intends to make more efficient use of its capital.

This may result in new acquisitions, potentially a big driver of its share price over the next six months. The Taiwanese government recently said it hopes to see a halving of Taiwan's dozen or so financial holding companies.

Fubon management have said this government policy has come at an optimal time for the group, since they have just finished digesting their last acquisition. The merger of Fubon Commercial Bank and Taipei City Bank becomes legal on January 1.

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