CHUNGHWA TELECOM POSTPONES PRIVATIZATION PLANS

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002822

SIPDIS

STATE FOR EAP/RSP/TC, STATE PASS USTR FOR WINELAND, WINTERS
AND FREEMAN, USDOC FOR 4431/ITA/MAC/AP/OBP/TAIWAN/MBMORGAN

E.O. 12958: DECL: 06/27/2015
TAGS: ECON ETRD ECPS ELAB TW
SUBJECT: CHUNGHWA TELECOM POSTPONES PRIVATIZATION PLANS

REF: TAIPEI 2084

Classified By: AIT Director Douglas Paal, Reason 1.4 (b)


1. (U) Summary: Chairman Ho-chen Tan told a Chunghwa
Telecom (CHT) shareholders meeting on June 21 that continued
concerns over employee benefits would delay until August the
planned privatization of CHT through the sale of 17% of CHT
shares. However, Ho-chen insisted that CHT remains committed
to privatization, in spite of the Legislative Yuan's (LY)
passage of a resolution calling on the government to suspend
the share sale. CHT union leaders are planning a general
strike on July 1 across Taiwan and have been preparing to
travel to the U.S. to protest during Chairman Ho-chen's
upcoming roadshow. Industry insiders agree that the sale
will go forward despite the union's protests. End Summary.

===========================================
CHT's Halting March Toward Privatization...
===========================================


2. (U) The Taiwan government announced in January that it
would once again try to sell 15% of its shares of CHT as
American Depository Receipts (ADRs) on the New York Stock
Exchange (NYSE) in the second quarter of 2005 and a further
2% on the Taiwan Stock Exchange (TAIEX). A similar plan in
2004 was postponed when CHT union members protested. This
year, CHT has pressed forward with the plan, in spite of
labor union protests. On May 24, CHT announced it had chosen
Goldman Sachs, UBS, and Morgan-Stanley to jointly manage the
ADR issuance. A few days later (5/27),the Legislative Yuan
passed an opposition-sponsored resolution calling on the
government to suspend the privatization of CHT due to
concerns that the sale would benefit "certain conglomorates"
allied with the government, generally assumed to be CHTs
competitors in the telecom business. Opposition lawmakers
also complained that the timing of the sale would not
maximize revenues for the government.

3.. (U) In spite of opposition from the LY, the CHT Board of
Directors approved the ADR sales plan in a private meeting
June 15. This prompted union members to clash with police
outside the CHT shareholders meeting June 21. CHT Chairman
Ho-chen said after the meeting that CHT needed to fulfill
local and U.S. regulatory requirements before the share sale
could proceed and that the process could take several weeks.
However, most analysts believe the delay was a direct result
of the union protests. Ho-chen vowed to take care of the
issue of employee benefits before the ADRs were released for
sale.

======================
...Still Going Forward
======================


4. (C) Analysts and government insiders agree that the CHT's
privatization plan will go forward this time, even if delayed
by several weeks. CHT's Senior Director of Planning Mark Lee
told AIT that the LY resolution, while influential, was not
binding and that the government was not likely to
significantly alter its plans as a result. He noted that the
LY had approved CHT's broad privatization plan in 2001 and
that the market for telecom shares appears to be as strong as
it has been for several years, potentially maximizing income
for the government. CHT management continues to discuss
labor concerns about job losses and changes to the pension
plan, but there are some issues that are best resolved by
government agencies, including the Council of Labor Affairs,
and the union.


5. (C) Kao Kai-sheng, Deputy Director General of the
Directorate General of Telecoms (DGT),agreed with Lee that
CHT privatization would move ahead this summer. Kao
confirmed that the LY resolution was advisory in nature and
not legally binding, but said that the Executive Yuan (EY)
was actively considering how best to respond to the LY's
decision. In an unusual move, the EY announced June 23 that
the LY resolution was not legally binding and that the sale
of ADRs should continue. This is the first time we have seen
the EY issue such a statement in response to an LY
resolution. Kao also confirmed that CHT Chairman Ho-chen
would travel to the U.S. as scheduled in the first week of
July for a "roadshow."


6. (C) Industry analysts from financial management firms
CLSA and PriceWaterhouseCoopers are confident that the
privatization plan will move forward, in spite of the LY
announcement. PWC's Jason Wang noted that the shareholders
meeting had postponed the dividend issuance date from July to
mid-August, presumably to allow privatization to occur
before the dividend was issued. Democratic Progressive Party
legislator Phoenix Cheng agreed that CHT would go forward
soon, noting that privatization was already too far along to
be stopped. Cheng suggested that the LY resolution was just
another example of the opposition parties strategy of seeking
headlines and political advantage by opposing any government
supported initiative.

=============================
But CHT's Union not Giving Up
=============================


7. (C) Union officials, however, are not going along
quietly. Following a small demonstration in May and the
clash between union members and police outside the CHT
shareholders meeting on June 21, union officials announced
they would file a lawsuit against CHT management and the
Ministry of Transportation and Communications (MOTC),
accusing the defendants of breaching the trust of the
shareholders. The head of CHT's union, Simon Chang, said he
hopes the lawsuit will raise concerns among potential buyers
about CHT's corporate governance and labor relations. Chang
told AIT that the union believes CHT should fix corporate
governance problems and guarentee worker rights before
selling shares. The union has announced plans for a July 1
strike.


8. (C) AIT's NIV section also reports several CHT union
leaders, including Simon Chang, have recently applied for
U.S. visas, citing plans to go to New York for "tourism" at
the same time CHT Chairman Ho-chen is expected in New York.
Chang denied reports that union leadership was planning
protests in the U.S. to coincide with the CHT roadshow.
However, he told AIT that the union, with assistance from the
US Telecommunication Workers Union, will hold at least one
anti-privatization themed press conference in New York while
CHT Chairman Ho-chen is there. According to Chang, if the
union can force CHT to delay until the next session of the LY
(scheduled to begin September 1) political pressure could
prevent CHT from issuing ADRs.


9. (C) Comment: With the sale of these shares, CHT will
finally be privatized, fulfilling a commitment the Taiwan
government made prior to WTO accession. The union knows this
will be their last chance to negotiate with the government
over CHT's labor package and doesn't want to let the
opportunity slip by without extracting the best possible
deal. Union members are undoubtedly inspired by the recent
failure to privatize Changhwa Bank after a series of
management concessions on pay, job security and retirement
drove the share price down so low that the share issuance
became economically unsound.

10 (C) Comment Continued: Despite the CHT union's opposition,
most analysts agree the ADR issuance will take place, albeit
slightly delayed. The practical impact on CHT operations of
privatization is likely to be small. The government, through
MOTC, will still retain control of CHT's Board of Directors.
The Public Construction Commission and CHT assure us that CHT
procurement will still be subject to the requirements of
Taiwan's Government Procurement regulations. Analysts and
CHT management believe CHT is unlikely to radically alter its
business practices. Although CHT employees will no longer be
considered civil servants, CHT spokesmen have insisted there
will be no layoffs or pay cuts. The question of retirement
benefits remains to be settled, but the new national pension
law going into effect July 1 and CHT's desire to see
privatization completed before the next LY session should
inspire both sides to reach agreement. End Comment.
PAAL