In early March, Sunplus Technology achieved an 8.28% discount to spot via UBS Warburg and two months later, Compal Electronics came at a 6.32% discount via Goldman Sachs. At 10%, Yageo also falls outside the 6% median discount achieved by the 15 or so Taiwanese companies that have gone to either the ADR or GDR market over the past two years (excluding UMC's NYSE listing, which skews the result).
Local experts believe that pricing was realistic given market conditions, but a number have queried why the company should want to press ahead with a downsized deal in difficult markets, particularly when there is no pressing need for cash and the GDR will force a change of terms to Yageo's recent convertible.
One explanation may lay in the fact that a large number of Taiwanese companies are planning to access the market after the August break and many fear that conditions will have deteriorated further by then. In this respect, Yageo has sought to maintain a pricing advantage by beating the crowd. Over the first four months of the year, for example, the TWSE appeared to have de-linked itself from the Nasdaq, rising just under 20% to the middle of April. As of Friday, however, it ended the year down 5.34% and many analysts believe it has further to go.
As James Wang, technology analyst at Merrill Lynch in Taipei explains, "Until about two months ago, US tech companies were being far more realistic about their earnings expectations for the year. Taiwanese companies thought that revenue would pick up again in the third quarter because it always has done for the last eight to ten years. We're now going through an adjustment as they become more realistic and the next key round will be August when all the second quarter figures are released."
Difficult markets led Yageo to opt for the lesser of two SEC filings for 320 million and 200 million shares. With one GDR unit representing five shares, some 40 million units were priced, raising a total of $136.48 million. Given that the company only has 18 million GDR's outstanding, the new deal should be a big boost to liquidity.
Books are said to have closed two times covered, with a total of about 60 accounts participating. By geography, this was split 45% UK, 40% Asia and 15% Continental Europe, with a balanced mix of both tech and country funds.
The company is said to have viewed the deal as means of reducing leverage and funding new acquisitions. Following its purchase of three factories from Philips last year, its debt to equity ratio stands at 75% and similar to its convertible in February, Yageo wanted to re-finance part of the bridging loan for the deal.
Bankers also say that the world's largest manufacturer of chip resistors is building a war chest. "The primary reason why the company wanted to do a second deal so quickly is because it is looking at how to maximize a lot of opportunities at the down point of the industry cycles," says one.
Analysts also say that the company has done a good job integrating the Philips factories. "This has been a case of a small company buying a larger one and cost aside, it has been very positive for Yageo, because it's broadened the company's production base and given it access to the European market," says one.
As a result, while most analysts have a buy recommendation on the fast growing company, they caution that it has not only outperformed the underlying index (up 22.56% year-to-date), but is still trading at historically expensive levels relative to the sector cycle.
"Yageo is trading at 1.5 times price-to-book and yes, this is a discount to US and Japanese comps that trade around the two times," the analyst continues. "However, during the last industry cycle, the company's price-to-book peaked at two times and was down to only one times at the trough."
Bankers also believe that for JPMorgan, the deal represents a loss leader to consolidate what was formerly Jar dine Fleming's strong franchise in the Taiwanese tech sector. Rivals say that the bank gave a hard underwriting commitment at a 4% discount to spot and after the stock traded limit down a day after pricing, is now almost certainly long the transaction. An official replied that, "this is a book-built transaction with orders taken in relation to market conditions."Because the deal comes within the lock-up period of its convertible, it will also have to amend some of the terms. In particular there will be a 10% adjustment to the conversion price. Launched in February, the company raised $235 million in a deal led by Salomon Smith Barney.