Participants in Chunghwa Telecom’s on-off American depositary receipt (ADR) issue are playing a game of bluff and double bluff as they amass support for a dignified climbdown on the deal’s pricing stalemate.
The Taiwanese company’s international issue will happen, observers believe – the trick will be in bringing it at a price that will sell while enabling the Taiwan government to save face.
The ADRs, which are central to the government’s privatization plans and Chunghwa’s independence ambitions, were put on hold in January amid disagreements on pricing between the government and underwriters Goldman Sachs, Merrill Lynch and UBS Warburg.
Chunghwa and the government are still reeling from a disastrous IPO last year, blamed partly on over-optimistic pricing, after the government fixed a minimum issue price of NT$104. Less than 3% of the company was sold to the public, compared with a target of 16%.
With stock prices falling and several other telecom companies coming to market, the underwriters are fighting hard to convince the transport and communications ministry of the need for more realistic pricing this time round.
The government, though, is under pressure not to sell national assets to foreigners too cheaply, and the consensus-building requirement of Taiwanese politics is playing an important role in pricing.
Selling to foreigners per se is not an issue, insists Jason Tuan, head of research at Taiwan Securities. It is more a question of selling to foreigners at what is perceived as a low price, he says.
“People here do not have a problem with selling shares internationally,” he adds. “It’s a fairly open society, a small island and heavily dependent on exports. They are not emotional about foreigners, just the price. If they can criticize the government, they will magnify it.”
The plan was for Chunghwa Telecom, Taiwan’s biggest telephone company, to issue 115.8 billion 10-for-one ADRs, representing about 12% of share capital.
Meanwhile, another Taiwan telecom company, FarEasTone, is planning to launch an ADR issue in the first half of this year, and Taiwan Cellular Corporation is also expected to come to the market.
Following the decision to delay the issue, just days before the banks were about to embark on a roadshow, the government has been working on drumming up support from domestic institutions to take on the shares instead, while still negotiating with the underwriters to push forward the US deal. And although a price had not been agreed, bankers were continuing their pre-marketing efforts.
Analysts doubt that a domestic issue would work. “There is a lot of overall liquidity in the market, but maybe not if Chunghwa Telecom comes to the market,” says Tuan. “Local people already fear there may be an outflow of capital into China. If the government decided to raise a huge offering domestically it would impact on the market in a psychological way.”
Tuan adds: “Everyone is trying to bargain, but it is just a gesture. I am very sceptical about the outcome and whether the domestic market can absorb it.”
But the government is in a cleft stick, with the relatively new ruling Democratic Progressive Party lacking a majority in congress and facing pressure to get a good price.
Indeed, in a bid for consensus, the government has done a lot of thinking out loud in the media, mooting a range of options, from a domestic issue to exchangeable bonds, to gauge sentiment.
The domestic issue was just one possibility, anyway, and not necessarily a new track to which the government is fully committed.
“I do not think the government has taken any decision as to what it wants to do,” says one commentator.
“Taiwan culture is that the government needs to be very transparent every step of the way. In the Taiwan political environment they really need to get a consensus. It’s more a political tool than a negotiating tool,” she adds.
Another possibility is to reduce the size of the offer, hoping that the secondary market share price will rise on the prospect of more modest new supply, setting a new indicative starting point for price discovery. The Taiwan insurance industry is still highly regulated, so the government has considerable power over potential institutional investors. Hence there is some leverage for the domestic price of the Chunghwa shares to be bid up, before the government and underwriters return to the negotiating table, reckons one analyst.
That, coupled with the concept of a domestic issue, may give the government the ammunition it needs to cover its back with the electorate and still get the deal done internationally.
“It’s more like tactics than a final resolution of the problem,” says an analyst.
“The international offer will happen. The domestic market is just not big enough,” says Tuan, explaining that the country’s banking system also needs fresh capital, and the local market’s capacity is just not strong enough to absorb both sectors.
Foreign investors may have concerns other than simply price.
“It’s a market positioning concern. If you want to track the benchmark, you cannot afford to be totally absent from this issue. It’s just a question of how much,” says Tuan, adding: “The pricing is not really that far away from international standards. It’s not really that expensive. The company has still got monopoly power.”
The market’s expectation, of the mid-NT$60s range, a 20% discount to the company’s prevailing market price of around NT$80, was far away from the NT$108 level talked about by the government. There was simply “no way” a deal could be done at that price, Tuan adds.
On the positive side, the pre-marketing may have served to broaden and deepen the potential investor base for Chunghwa Telecom, with banks emphasizing the strength of the Taiwan market and the fact that Chunghwa is a solid company.
The unknown dynamic is when the government will deem it has sufficient consensus to be able to set a price.
