Carlyle Acquires Ta Chong Commercial Bank

UNCLAS SECTION 01 OF 02 TAIPEI 001646 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH and Stratford USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/TTYANG TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN AND NY FRB MARIA BOLIS E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Carlyle Acquires Ta Chong Commercial Bank SUMMARY -------------- ¶1. The U.S.-based Carlyle group has become the latest foreign investor to acquire a significant share of equity in a Taiwan bank by private placement, with half of the required funds obtained from local sources. Carlyle will participate in the management of the Taiwan bank. Banking sector M&A will continue, and according to the financial reform plan, foreign investors will eventually have the chance to acquire and operate one of the top three Taiwan banks. END SUMMARY. Acquisition by Private Placement -------------- ¶2. In early July, Carlyle beat two private equity funds (i.e., MBK of South Korea and Affinity of Singapore) in a bid for Ta Chong Commercial Bank (TCCB). According to a contract signed on July 10, Carlyle and its investment partners will acquire 36% of TCCB for NT$21.5 billion (US$651.5 million) by private placement. The transaction will be completed before the end of September. Cost Well above Value -------------- ¶3. TCCB will issue 588 million common stocks, 235 million special stocks (convertible to common stocks),and NT$7.5 billion in bank debentures convertible into common stocks one year after the issuance to facilitate Carlyle's acquisition. The cost will be NT$17 (US$0.51) per share, 43% higher than the TCCB share price of NT$11.5 on July 2-6 or 122% higher than the net worth per share of NT$7.64. Carlyle will obtain a loan from Taipei Fubon Commercial Bank to meet over half of the acquisition funding requirement. Joint Operation -------------- ¶4. Unlike a September 2006 acquisition in which Standard Charted de-listed Hsinchu International Bank, Carlyle has assured other TCCB shareholders that it will not de-list TCCB from the Taiwan Stock Exchange. Carlyle will obtain seven of the thirteen seats of TCCB's board of directors. However, Carlyle will allow the incumbent TCCB chairman and president to retain their positions, although the next president must be appointed by Carlyle. Improvement in Bank Quality -------------- 
¶5. The additional funds to be contributed by Carlyle and its partners will further improve TCCB's quality, which is already above the minimum criteria set by Taiwan's regulators. TCCB's capital adequacy ratio will increase from 8.7% to 13%, above the 8% minimum requirement. Bad debt reserves will rise from 44% of total non-performing loans (NPLs) to over 60%, above the 40% minimum requirement. Meanwhile, the NPL ratio will decline from 3.3% to below 2%, compared to a minimum requirement of 5%. Merger and Acquisition (M&A) Market -------------- ¶6. Over the past one and a half years, foreign investors have acquired eight Taiwan banks: --In January 2006, GE Consumer Finance (U.S.) acquired 10% of Cosmos Bank for NT$2,775 million (US$84 million) and has since participated in the bank's operation. TAIPEI 00001646 002 OF 002 --In March 2006, New Bridge (U.S.) and Nomura Securities (Japan) bought 23% of Taishin Financial Holdings (TFH) for NT$31 billion (US$939 million). The major local shareholder (Thomas Wu) continues to control and operate TFH. --In March 2006, Temasek Holdings (Singapore) purchased 6.3% of E. Sun Financial Holdings (ESFH) for US$133 million. Major local shareholders continue to operate ESFH. --In May 2006, Shinsei Bank (Japan) and Integral (a private equity fund) bought 44.5% of Jih Sun Financial Holdings (JSFH) for NT$12 billion (US$364 million) and since then have installed their own line managers in JSFH subsidiary Jih Sun International Bank. --In June 2006, Dai Ichi Mutual Life (Japan) purchased 6.5% of Shin Kong Financial Holdings (SKFH) for NT$7 billion (US$212 million). --In September 2006, Standard Chartered (U.K.) acquired 95.4% of Hsinchu International Bank (HIB) for NT$38.65 billion (US$1.17 billion) and subsequently de-listed HIB from Taiwan's stock market. Standard Chartered has since become the largest foreign bank in Taiwan. --In March 2007, Citibank (U.S.) acquired 100% of Overseas Chinese Bank (OCB) for NT$40 billion (US$1.2 billion) and subsequently de-listed the bank from Taiwan's stock market. --In June 2007, ABN AMRO Bank won a bid to take over the insolvent Taitung Business Bank (TBB),and Taiwan's Central Deposit Insurance Corporation (CDIC) will pay ABN AMRO NT$6.9 billion (US$209 million) as compensation. ABN AMRO will become the third-largest foreign bank in Taiwan, second to Standard Chartered and Citibank. ¶7. Two M&A cases have happened among local banks since early last year. In May 2007, ChinaTrust Commercial Bank (CCB) won a bid to take over the insolvent Enterprise Bank of Hualien (EBH),and the CDIC will pay CCB NT$4.49 billion (US$136 million) as compensation. With the acquisition, CCB has become the largest private bank in Taiwan in terms of banking offices. In early July, the state-owned Bank of Taiwan merged with the state-owned Central Trust of China. After the merger, the new Bank of Taiwan has become the 19th largest bank in Asia and 114th largest in the world. Comment -------------- ¶8. Banking sector consolidation will continue to take place as Taiwan promotes the second stage of financial reform through which Taiwan authorities will reduce the number of state-owned banks and encourage financial institutions to merge. Foreign investors remain competitive in the Taiwan M&A market, since the program has set a goal to have a foreign investor acquire and operate one of the largest three banks. YOUNG