SinoPac finds merger partner

A new merger will see the creation of Taiwan''s fourth largest private sector bank.

In an event that could trigger the long-awaited next round of bank consolidations in Taiwan, SinoPac FHC and International Bank of Taipei (IBT) have announced they will merge.

The deal is being structured as a merger of equals - ie there is no acquirer and therefore no acquisition premium is being offered. This is the first such deal in Taiwan, although it is quite common in the US, where Bank of America and Nationsbank, for example, did a merger of equals.

Should the merger be approved at forthcoming EGMs in August, the new entity - which will retain the name SinoPac - will have a $3.9 billion market capitalization, NT$1 trillion of assets, 129 branches and will rank as Taiwan's fourth largest private sector bank and eighth largest financial holding company. And while it will still be smaller than Chinatrust, Fubon and Cathay; it will boast the island's foremost regional network, with branches in California, Hong Kong, Macau, Vietnam, and a rep office in China.

The deal is being structured as a stock swap. IBT shareholders will receive 1.42 SinoPac shares for each of their own, but after the payment of a cash dividend, that number dilutes slightly to 1.36.

The architect of the deal is IBT's Chairman Ho Shou-chuan, whose family-owned YFY Group is the single largest shareholder in IBT. He also owns around 15% of SinoPac. It is estimated that he will control between 20-25% in the combined entity.

However, the proposal to merge was not plain sailing. IBT's board only narrowly approved the deal: 13 directors voting for, and 12 voting against. There are various theories as to why the vote was such a close-run thing. One is that there were objections to doing a deal that saw IBT sold without a premium; another centres on the politics of Taiwan's bank mergers.

IBT's major shareholders include two other financial institutions, Taishin Financial and Shinkong (with around 20% between them) while other key shareholders include the head of the KMT, Lien Chan and the Lo family (whose Kenneth Lo was a former President of Chinatrust Bank).

It is well known that SinoPac has been in play for quite some time, and had originally mandated Goldman Sachs to arrange its sale. One of those interested parties was Taishin, although no deal was formalized. It appears a stumbling block was the attitude of SinoPac's formidable CEO, Paul Lo - who wanted to retain management control of any newly merged entity - and the attitude of Chairman Ho, who is reckoned to have spurned the approach.

It is therefore not hard to imagine a certain acrimony developing in Taishin's attitude to this deal, especially as it will not be able to sell out of its position at a premium. And the fact that that board vote was so close, means the EGM on August 26 cannot be assumed to be a done deal. For the deal to be approved there either needs to be a 50% quorum and two thirds in favour, or a 66% quorum and 50% in favour. Under Taiwanese law, Ho is able to vote his stock even though this might be considered a connected transaction.

The two banks complement each other quite well. SinoPac is a financial holding company with a commercial bank and securities company, and owns the Far East National Bank in the US. It has long been a favoured banking stock among foreign fund managers thanks its reputation for asset quality and astute management. IBT has a similarly strong reputation for asset quality, and has focused particularly on the SME sector in Greater Taipei.

However, both banks have been trading at a much lower price to book ratio than some of their bigger rivals. IBT trades at 1.4 times and SinoPac at 1.3 times, versus Chinatrust which trades at 2 times.

It is hoped that post-deal this fact will change and it will allow a re-rating in which the combined entity will trade at a similar level. The combined entity expects to see NT$2-3 billion of pre-tax synergies by 2008 and reckons the deal will be earnings accretive immediately.

It is rumoured that Paul Lo will emerge as the CEO in the new entity, and that Edward Chien - SinoPac's current chairman - will retain the chairman role.

A deal of some sort is long overdue for Lo, who has been talking about mergers for a good while. The fact that he has engineered a deal where he retains control obviously makes it sweeter.

However, the new entity (should it get EGM approval) still remains some way off the leaderboard in Taiwanese banking, as Lo will well know. Few doubt Lo will look to bed this deal down quickly and use his position at the helm of a bigger entity to engineer a yet bigger deal to hoist SinoPac into the big league.

The endgame, some think, might be government-controlled Huanan - which currently has a $4.4 billion market cap, and assets of $50 billion. What makes this prospect worth speculation is the fact that SinoPac's chairman, Edward Chien was formerly chairman of Huanan. On the negative side, the government has publicly stated that it would prefer to sell control of Huanan and First Financial to major foreign banks - taking a similar path to Korea.

Of course, all of the above is way in the future since this deal still has to be approved. Should it be so, the merger will be completed in November.

USB advised SinoPac, and Morgan Stanley advised IBT.