Taiwan's CPT sells $295 million of GDRs

TFT-LCD display manufacturer Chunghwa Picture Tubes (CPT) yesterday became the second Taiwanese company to issue global depositary receipts (GDRs) under new rules that allow a discount of up to 20% versus the market price, raising $295 million. But while the overall offering went quite well, with institutional investors ordering close to twice the number of GDRs initially available to them, a mandatory concurrent sale to existing investors met with a muted response, suggesting that the new rules may still need tweaking.

The idea of a concurrent offering to existing shareholders, which was introduced by the Taiwan securities regulator at the same time as it widened the maximum discount on follow-on offerings to 20% from 10%, is in theory a good one as it gives shareholders an opportunity to top up their holdings so as not to automatically get hit by a dilution at a discount that may be as steep as 20%.

But in reality these sales have had little impact so far, as the take-up has been quite minimal. One reason is that the time existing shareholders have to learn about the sale, make a decision whether to participate, and file the necessary forms is the same as the length of the institutional bookbuilding. In the case of CPT this was 10 hours during the Asian trading day, but it may well be just a few hours in the evening - as was the case with Gintech's offering in March - and for retail investors in particular, that doesn't leave a lot of time to act.

Indeed, sources say that by mid-afternoon yesterday, when the CPT offering had been open for about seven hours, the priority offering had attracted orders for only about 1.8 million GDRs, compared with the 20 million GDRs initially earmarked for this tranche. As a result, the bookrunners decided to increase the size of the institutional offering to include the rest of the priority tranche as well, which effectively boosted the deal targeted at international investors by 23%.

Earlier this week, Shin Kong Financial Holding cancelled the priority offering on its $375 million GDR sale altogether after it was able to price the deal at a discount below 10% - the cut-off point for whether the new or old rules will apply. This meant that CPT was really the first company to test the new rules since Gintech's inaugural issue earlier this year.

The loss-making company, which is in dire need of capital both to meet its operating costs and to repay existing debt, offered 100 million GDRs, with 80 million initially aimed at international investors and 20 million set aside for existing investors. After the relocation between the tranches, the international tranche was increased to just over 98 million shares.

The size increase had implications for the final price since it may have been possible to tighten the discount somewhat had the initial size remained unchanged - a substantial portion of the orders were said to have had a discount limit of 15%. However, the company clearly has a need for the cash and the decision was made to prioritise size over price.

This meant the final price was set at a 19.7% discount over yesterday's closing price of NT$4.83 for the company's Taiwan-listed common shares. That gave a price of NT$3.88 per common share, or $2.95 per GDR. Each GDR is equal to 25 common shares and the total deal size accounted for about 21% of the issued share capital.

The deal was launched at about 8am yesterday (Hong Kong time) and kept open until about 6pm, and as CPT's Taiwan-listed shares remained open for trading, this meant the offering was marketed against a live price during the first part of the bookbuilding. The price held up quite well though, losing only 3.4% on the day, which may have helped convince interested investors to submit orders.

The stock had a strong run-up earlier this month when it ended limit up (close to 7%) three days in a row after the company confirmed that it was about to introduce a new strategic investor to replace US private equity firm Warburg Pincus, which has decided to put its convertible bonds back to the company at the end of this month. If converted into shares, the CBs would have given Warburg Pincus a 10% stake in the company, although the bonds have been hopelessly out of money ever since Warburg Pincus bought them in September 2007.

When CPT announced last Thursday that the strategic investor was Taiwan-based Compal Electronics, the world's second largest contract maker of laptops and a customer of CPT's, there was no more positive share price reaction, however. In fact, the stock has fallen every day since, losing a combined 12.2%.

Still, CPT should be better off with a strategic investor rather than just a financial investor like Warburg Pincus. Analysts note that CPT may for instance use some of its excess capacity to make products for Compal. In addition, the capital-raising, which aside from the GDRs and the sale of up to NT$7 billion ($213 million) worth of common shares to Compal also includes a sale of NT$3 billion common share to CPT's largest shareholder the Tatung Group, comes at a time when sector specialists are starting to become more positive about a turnaround in the business cycle. With the improved balance sheet, CPT should be in a better position to benefit.

About 60 international investors were said to have participated in the GDR offering and according to one source the deal was more than 1.5 times covered, based on the full 100 million GDR size. The buyers were predominantly from Asia, with UK-based accounts said to have taken about 25%, and included a mix of hedge funds and long-only funds. 

The deal was arranged by Royal Bank of Scotland and UBS.