Warburg Pincus makes $250 million Taiwan investment

The private equity firm will buy convertible bonds in Chunghwa Picture Tubes representing a 10% stake, signalling its confidence in the future of the beleaguered company.
Warburg Pincus will invest $250 million in convertible bonds issued by Chunghwa Picture Tubes (CPT).

The private equity firm will buy six-year, zero-coupon convertible bonds, which will give it a stake of 10.2% in the company on conversion. The conversion price is set at NT$8.50 ($0.26), a 4% premium to the NT$8.17 closing price of the shares on the Taiwan Stock Exchange on September 14. The bonds are puttable at year 1.5, 3, and 4.5 at 105.91%, 112.16%, 125.01% of the relevant redemption amount. Further, CPT has an option to buyback the bonds after 3 years at a pre-defined price, based on trading performance.

The investment is structured as a private placement which means Warburg Pincus is subject to a three-year lock-in on its holding. ôThe structure agreed between the investor and CPT, including specifically the lock-up, reinforces Warburg PincusÆ intent to be a long-term investor and add value to CPTÆs business,ö comments a source close to the deal.

CPT is a manufacturer of TFT-LCD (thin-film transistor liquid crystal displays), and has been in the display industry for over 30 years. Its customers include Samsung, LG Electronics, Philips, Dell and Sony. CPT is listed on the Taiwan Stock Exchange with a market capitalisation of approximately $2.1 billion.

ôWarburg PincusÆ investment in CPT is the first investment by a private equity investor in a publicly listed TFT-LCD manufacturer,ö says Meighen Robertson, co-head of telecommunications, media and technology, Asia at ABN AMRO, advisors to CPT. ôThis transaction has occurred at a premium, during a time of high market volatility, underscoring the strength of Warburg PincusÆ endorsement of CPT and its management team.ö

For calendar 2006, CPT had consolidated sales of NT$126 billion ($3.8 billion), up 22% from NT$103 billion for the previous year. Of this, NT$105 billion were from TFT technology, up from NT$78 billion the previous year, a 34.5% increase derived from an increase in unit shipments for large-sized panels of 53% year-on-year to 23,482 in 2006.

CPT made a loss of NT$13.9 billion for the year 2006, nearly double the loss of NT$7.35 billion that it recorded in 2005.

Warburg Pincus is buying shares at an equity value of $2.45 billion, which represents a sales multiple of 0.64 times CPTÆs 2006 sales. As CPT was loss-making in 2006, earnings multiples are not meaningful. Warburg Pincus did not have an advisor.

Warburg Pincus is demonstrating confidence in a sector which has been facing difficult times, corroborating analystsÆ beliefs that the worst could be over. Most LCD-TV makers had inventory pile-ups in 2006, causing prices of LCDs to fall. The resulting price pressure had an adverse impact on the ability of TFT-LCD makers to hold their prices.

But specialists feel the sector has bottomed out and that increased customer demand will cause sales in the TFT-LCD industry to aggregate $62 billion in 2007, up 22% from 2006. Further, experts suggest LCDs will overtake glass-tube sets as the biggest television technology in 2008.

Players like CPT, which invested in new capacity even during the downturn, are expected to be well placed to reap the benefits of the pick-up. CPT will use the money from the Warburg Pincus investment to re-finance existing debt or for working capital purposes.

CPT is the third largest player in Taiwan, following AU and Chi Mei Optoelectronics. South Korea's LG Philips and Samsung Electronics are leading non-Taiwanese competitors.

CPT said it will leverage Warburg PincusÆ global network and financial management expertise to further enhance its business. CPT has gained an anchor investor which strengthens its investor base. No change to the board or management of the company is envisaged as part of the deal.

Warburg Pincus has invested more than $3.5 billion in Asia since 1994 and, in the past four decades, more than $12 billion in technology, media and telecommunications companies.

The deal is subject to routine regulatory approvals which are expected to be received before the end of calendar 2007.
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