TSMC ADR and Benq GDR priced

The semiconductor giant prices at a record discount to spot after another busy day for the Taiwanese equity markets.

Joint bookrunners Goldman Sachs and Merrill Lynch completed an accelerated ADR in Taiwan Semiconductor Manufacturing Company after New York's close yesterday (Tuesday) raising $945 million for the Taiwanese government (post greenshoe). The deal stands as the largest equity offering from Asia so far this year by some margin and for the Taiwanese government, is likely to be viewed as a huge success.

Pricing came at a record slim 0.67% discount to spot after a swifter than expected 15 hour marketing period, which saw the order book close two times covered with very little price sensitivity. The sale represented a divestment by the National Development Fund (NDF), which sold 98% of the 79 million unit deal. A further 1% was sold by TSMC management and 1% by a company subsidiary.

There is also an 11.76 million unit shoe, with a ratio of five shares per unit. Co-managers were Credit Suisse First Boston and JPMorgan.

The deal was priced at $10.40 compared to a last sale of $10.47. This represented a 16.13% premium to the stock's NT$62 close in Taiwan.

The stand-out aspect of the transaction is the slim discount, which is even more remarkable given the execution of the deal on a book built rather than bought deal basis. Last year, for example, the NDF completed an $871 million divestment on a book built basis at a discount of 1.3% to the ADR's last sale.

But the two previous deals before this were both bid out to investment banks, which pitched aggressively in order to win TSMC business. As a result, a $291 million deal by Merrill Lynch in June 2001 was completed at a 0.86% discount and a $321 million deal by Goldman Sachs in November the same year at a 0.743% discount.

This time round, the government could hardly have timed its deal better, with strong momentum propelling the TWSE upwards even before the Chen administration announced this Monday that it will be lifting a number of QFII restrictions.

As the index's most liquid stock, TSMC climbed 6.3% on the day of the announcement and 1.6% the day after, even though it had gone ex-dividend at the beginning of the week and would have been expected to drop. The ADR, on the other hand rose 10% on Monday, but slipped 6% on Tuesday as investors shorted the stock in anticipation of new paper.

This bought the premium to the underlying stock down from previous a trading band of 20% to 24%. Over the past couple of years, observers report that the premium between the ADR and underlying stock has been steadily eroded as more global investors establish themselves in Asia. Last year, by contrast, the premium was still up in the 35% to 40% range.

For the Taiwanese government and TSMC, one of the key aims remains the diversification of the company's investor base and a large number of new investors were noted in the deal. About 230 accounts are said to have participated with a geographical split, which saw about 75% of the deal placed in the US, 15% in Europe and 10% in Asia.

By investor type, there were a mixture of long-term investors and the usual array of momentum players chasing both the tech upswing and premium trade. Most believe that the rally is set to continue even though some analysts believe that TSMC is becoming expensive.

Year-to-date, the stock is up 57.18%, although it has not yet hit the $16.75 issue price of the NDF's last sale in February 2002. At current trading levels, the counter is trading at about 4.1 times 2002 book according to CSFB estimates.

In a research report published before the black-out period, the firm argued that the valuation has become very rich. "Analysts compare TSMC's current price to book with historical numbers to evaluate its under/over valuation," it commented. "However, we believe this misses the point that the long-term growth and profitability expectations of the semi industry has decreased."

And it went on to add, that with the exception of 1999 to 2000, TSMC's price to book has only cross five times for very brief periods. It concluded that with liquidity driving markets, TSMC will continue to perform.

"It is impossible for us to forecast the top," it said. "We do, however, believe that fundamentally the share is expensive and the expected strong global economy recovery is still not certain."
Earlier in the evening Asian time, Goldman Sachs also completed a $123 million GDR for peripherals manufacturer Benq Corp. The deal, which represents a divestment by Acer Corp, had been bid out to Goldman and Nomura on a competitive basis after Taiwan's close.

Having owned 20% of the company's issued share capital pre-deal, Acer will drop to 15.2% post deal, post greenshoe. A total of 20 million DR units were sold on a ratio of five shares per unit.

Pricing was completed at a 2.75% discount to the stock's NT$43.5 close, the tightest discount for a GDR issue since 2000. The last time Acer sold down stock was in January 2002 when it raised $75 million from the sale of 10 million units at a 4% discount to a spot price of NT$54.5.

Similar to 2002, Observers report an order book with about 33 investors and a geographical split of 50% Asia, 50% Europe.

Year-to-date, the stock is up 34.19%, but has slightly underperformed the overall tech sector. Analysts attribute this to the overhang created by Acer's sell-down, which the success of the new deal should alleviate.