ALTERED STATES - DEALS OF 2002
How CFOs are using deals in lean times to transform their companies, restore them to health and position them for growth.
By Abe De Ramos, Jasper Moiseiwitsch and Tom Leander

It may not have been a vintage year in the usually vibrant world of Asian corporate finance, but there were still some tasty deals in 2002. And that's quite an achievement given the crippling financial climate. As the global economy moved from bad to worse, many companies, naturally weakened by their own credit standing, were either rendered vulnerable to competition or simply saw their funding sources dry up.

With rising premiums to access the capital markets, many finance chiefs were reduced to merely trying to minimize losses. But the most astute chief executives and CFOs in the region refused to let hardships sway their fortunes. They didn't simply manage risks; they saw opportunities to transform their businesses.

As such, the best deals of the year are remarkable, but not for the usual reasons, such as the billions of dollars raised, or the thousands of people who queued for hours to subscribe to an IPO. They are outstanding because they show that corporate finance need not be confined to the goals of improving working capital or tiding a company over for a tough financial year. Given the changing demands from investors in the way companies run their businesses, corporate finance can take a lead in corporate transformation.

In choosing the winners for our third annual Deals of the Year, CFO Asia selected transactions that were significant because they didn't just plug potential holes; they promised better long-term opportunities to the companies involved. These deals, directly or indirectly, will also have a lasting impact on the CFOs' financial management skills as well as on their companies' corporate governance principles.

PLDT's Acquisition Defense Strategy
Financial advisor: JP Morgan

Betrayal, law suits, and a billion dollars are elements of a gripping Hollywood plot. But just when you thought that America had the monopoly on boardroom dramas, one of the most acrimonious this year happened on Asian soil. The case could have been a simple sale of a controlling stake, but events unravelled with such surprising twists that none of the players will view acquisitions the same way again.

The protagonist in the drama is PLDT, the dominant Philippine phone company. In June, Hong Kong-based First Pacific, owned by the Salim family, announced an agreement to sell its 24 percent stake in PLDT to John Gokongwei, a local tycoon who controls the JG Summit conglomerate. Under the deal, Gokongwei would pay First Pacific US$925 million for the stake, or a 300 percent premium over PLDT's then value of 300 pesos a share.

Simple as it seemed, the situation was unique because PLDT CEO Manuel Pangilinan, a career-oriented bachelor known for his working weekends, is also the executive chairman of First Pacific. His ignorance of the deal reveals the depth of the disagreement marring the decades-long relationship between him and the Salims.

The jolted Pangilinan and board of directors of PLDT, a New York-listed company, reacted with a lawsuit, saying First Pacific violated US securities laws for not disclosing its memorandum of agreement (MOA) with Gokongwei. When the MOA was disclosed, the version filed in the US showed that JG Summit, a PLDT competitor, was party to the agreement. The version filed in the Philippines, however, only had First Pacific and Gokongwei as parties.

The discrepancy had serious implications. The MOA confirmed that Pangilinan was to be replaced, and Gokongwei, or JG Summit, would appoint directors. Under PLDT by-laws, no competitor can sit on its board. As such, Pangilinan refused to open PLDT's books for due diligence until the discrepancy was clarified. Ultimately, an explanation came, but not until four weeks before the effectivity of the MOA lapsed. A humbled Gokongwei eventually backed out.

The peculiarities of the affair overshadowed a compelling reason why the takeover attempt failed. Unlike most acquisitions in Asia, this one relied solely on the power and understanding of the board of directors. The deal was not a hostile takeover since there was no general offer that would benefit - or undermine - all shareholders. Instead, it was a proxy contest, where the benefit of the high premium Gokongwei was willing to pay would go only to the Salims.

The decision depended on what directors thought about the value that Gokongwei could bring to PLDT - and thus its other shareholders - versus what Pangilinan could over time. "In a traditional hostile [takeover], it's about the money; in a proxy contest, it's about the new management team," says Todd Marin, managing director at JPMorgan, which advised PLDT on its defense strategy. "That's why you typically see proxy contests launched against targets that had management teams that have poorly performed. That's the argument the insurgent makes."

Sentiments swung both ways. Analysts agreed that ownership by cash-rich JG Summit could improve the credit rating of PLDT, a frequent borrower. But they also believed Pangilinan was capable of pulling PLDT out of its debt load.

In the end, directors sided with Pangilinan. Shares of JG Summit companies performed worse than PLDT's over time, while the sell-down of PLDT shares after the MOA announcement showed that shareholders did not welcome Gokongwei. The board's analysis of other performance metrics of PLDT and JG Summit, Marin says, also led to the directors' unanimous backing of Pangilinan.

Pangilinan's victory is only temporary. First Pacific is still finding ways to sell its stake, which could affect PLDT's already battered share price. But one thing is certain: if Pangilinan bungles or succeeds in managing PLDT, there is no question that the accountability, or the credit, is largely due to the board of directors. ADR

Hyundai Merchant Marine's sale of ocean car carrier unit
Financial advisors: Credit Suisse First Boston, Salomon Smith Barney

Sometimes, you have to be cruel to be kind - even to yourself. Hyundai Merchant Marine (HMM) of South Korea took this path in August when it sold its ocean car carrier unit to a Swiss-Norwegian consortium for US$1.5 billion. The result was practically a new lease on life for the deeply indebted company. The sale drastically cut its debt-to-equity ratio from a punitive 13.9 times to a more manageable three times.

The deal wouldn't have been as rich if HMM hadn't found the perfect structure to attract the perfect buyers. Prior to the sale, the division was cash-generative to HMM, being the exclusive carrier of cars made by Hyundai Motors and Kia Motors. The division had no substantial hard assets since almost all of its vessels were leased, so valuation depended on the future business the division could secure for itself.

While HMM was looking for buyers, it tried to convince Hyundai and Kia to retain their relationship with the unit. When the Wilhelmsen-Willenius consortium emerged as a potential buyer, Hyundai and Kia were convinced, and even took a 20 percent stake in the new company to be formed out of the sale. Wilhelmsen and Willenius each took a 40 percent stake in the new venture.

The deal would have Hyundai and Kia agreeing to ship their cars via the new venture for the next seven years. While this guaranteed the future of the business, the entry of the foreign partners also diversified revenue sources: if the Koreans' car supply goes down, the Europeans can bring in new capacity.

"This became the basis of the valuation of the business," says Moshin Nathani, managing director at Salomon Smith Barney. "It illustrates the maturity of the market that buyers are willing to pay real cash for future cash flows." That said, managers at CSFB, another advisor, note that due diligence necessary for the valuation was not easy: like other Korean conglomerates, HMM had never produced detailed financial statements for the car carrier unit.

The deal was valued at US$1.3 billion in cash and US$200 million in assumed debt. US$300 million of the cash component came from the equity injections of the new stakeholders, and US$1 billion in new debt. The lending banks were largely the same as HMM's creditors.

The deal created the world's largest ocean car carrier company. For the Scandinavians, they realized their mutual goal of expanding beyond Europe. For HMM, its remaining restructuring plans now seem to be simple tasks. ADR

Kirin Brewery's acquisition of a 15 percent stake in San Miguel Corp
Financial advisors: Deutsche Bank, Goldman Sachs

Call it a friendly brew. When Japanese beer maker Kirin took a 15 percent stake in the Philippines' San Miguel last December, they both embraced a partner with a shared ambition - regional growth. And beyond the warm glow of cross-border synergies, the deal had an impact on the fancy interplay between politics, state affairs, corporate finance, and corporate governance.

San Miguel, a food and beverage group, is not easy to own because of its complicated share structure. The Philippine government claims ownership of 47 percent of its shares, but 20 percent of this is also claimed by Eduardo Cojuangco, crony of the late dictator Ferdinand Marcos. A legal tussle froze the number of San Miguel shares, and foreign ownership was possible only through a small public float.

San Miguel's fortunes changed in 1998, when a partial legal victory gave Cojuangco control over the majority of the board seats. These included five directors, thought to side with Cojuangco, since they were appointed by former President Joseph Estrada, a political ally. The victory would allow San Miguel to issue new shares other than for stock dividends, which it did to accommodate Kirin.

Worried about share dilution, the Philippines, now under President Gloria Arroyo, knew it could play hardball in court. But the US$536 million that Kirin brought in was too large to ignore. Since the Asian crisis, Manila had suffered an exodus of foreign investments. So the Arroyo government proposed a pact: it would replace the five Estrada appointees with its own, and in return, wouldn't question Cojuangco's ownership of San Miguel for two years. It may be an open-ended solution, but all parties called it a winning deal.

For Kirin, its toehold in San Miguel through the purchase of new, as opposed to existing, shares is indisputable. "Kirin acquired new shares so no legal issues associated with those shares would arise," says Charles Martin, managing director for Deutsche Bank, which advised the Japanese brewer. "No one can come to Kirin after six months and say, 'Those are our shares.'" Kirin got two seats on the board, and with Manila's five, corporate governance at San Miguel should improve because of better checks and balances.

Shareholders unanimously approved of the Kirin buy-in, which came at a 25 percent premium over San Miguel shares at the time. The cash infusion gave San Miguel greater firepower to expand. It already has breweries overseas, but Kirin's implied financial backing gave it greater leverage in going regional. This is good for Kirin, which faces pricing pressures in Japan and sees the region as a growth area. ADR

Sunway City's property-backed securitization
Financial advisor: Deutsche Bank

In a region where the largest conglomerates are likely to be involved in real estate, it's a wonder why Asia ex Japan, hasn't yet developed a property-backed securitization market. But that may change as the market for new property remains weak while developers' debts remain a burden. Last October, a Malaysian company worked with the local regulators in issuing the first property-backed securitization in the country.

It wasn't an ordinary deal. Most asset-backed securities (ABS) in the developed markets - US, Europe, Japan and Australia - are commercial mortgage-backed securities. As such, most ABS issuers are financial institutions that own the mortgages. In Malaysia, the secondary market for mortgages has already been appropriated by the state-owned Cagamas, which buys mortgages from financial institutions. The kind of securitization deals most likely to emerge in Malaysia, therefore, are credit-tenant lease type transactions, in which the issuers are the property companies themselves.

Sunway City, which builds resorts, opened the market when it securitized six of its subsidiaries' property holdings. Sunway's huge debt level limited its ability to further raise capital to fund current projects. The deal, which raised 450 million ringgit (US$118 million), reduced its debt-to-equity ratio from 1.4 times to 0.7 times, and allowed CFO Yau Kok Seng to focus on Sunway's future business, instead of managing its high leverage.

Under the deal, Sunway sold at fair value six property holdings and some preferred shares to a special purpose vehicle, ABS Real Estate (AREB). To pay for them, AREB issued bonds, and then leased the property back to Sunway. As such, AREB had a steady cash flow from the leases, from which it would pay the interest and principal of the bonds. Sunway, on the other hand, was able to reduce its debt without losing control of its property. In fact, Sunway has the option of buying the property back from AREB after five years.

Because Malaysia had no rules for such transactions - such as those governing SPVs and their tax implications - Sunway had to work with the local SEC to make the deal possible. "This deal has been very insightful for both investors and regulators," says Roger Ng, head of liability risk management at Deutsche Bank in Kuala Lumpur. ADR

Resolution of Woori Financial's 10 trillion won non-performing loans
Arranger: Lehman Brothers

Hand it to Euoo-Sung Min for having his cake and eating it too. When the CFO of Woori Financial Group wanted to get rid of 10 trillion won (US$8.4 billion) worth of non-performing loans (NPLs) in the companies under his wing, he found not just a willing buyer of all the bad assets, but also a foreign partner to help expand Woori's services.

While Min wanted to clean up Woori's balance sheet, he also knew that a number of its NPLs had a fair chance of turning around. In fact, as the Korean economy recovered from the Asian crisis, NPL buyers, mostly foreign distressed fund managers, made as much as 35 percent returns from recovered NPLs.

Min, a former investment banker, knew this was to his advantage. In selling the NPLs, he set out two conditions: that the buyer purchase the assets through a joint venture (JV) company with Woori, and that it also buy US$180 million in bonds convertible to Woori shares. Two foreign buyers were short-listed, and US investment bank Lehman Brothers won over GE Capital.

The JV structure, which shares the benefits of the recovered loans with the same company that sold them, is a first in Korea. Prior NPL deals were straightforward sales. To make sure that the loans Woori sells to the JV are not re-consolidated in its balance sheet, Woori took only a 30 percent stake in the partnership. Under the deal, however, Lehman and Woori will have an equal split of the profits from the recovered loans.

The benefits to Woori don't end there. The convertible bonds it sold to Lehman are equivalent to a 5 percent stake in Woori, making Lehman a strategic partner. "Min wanted a partner that could help Woori come up with a non-asset revenue generating business, rather than just lending with a larger balance sheet," says Jae-Woo Lee, Lehman's country head in Korea. "They wanted to be in the derivatives business, and a partner who can teach them and transfer knowledge in this area."

And what does Lehman get from the deal? A lot, says Lee, who believes Lehman can still make 15 to 25 percent returns from its NPL purchases. With its stake in Woori, Lehman could benefit from the strengths of the group, particularly Woori Bank, Korea's second largest bank. "Woori has a large client base and a big balance sheet, but we have the expertise and technology, so we'll create synergies," says Lee.

The success of the deal also adds to Lehman's credentials as it eyes NPL deals in Taiwan and China. "Due to [the deal's] wide applicability, Lehman is now in advanced discussions with other banks in North Asia about applying similar models," Lee adds. ADR

LG Electronics demerger
Financial advisor: Salomon Smith Barney

A "demerger" is an M&A term that sounds more like a step backwards than forwards. But South Korea's LG Electronics (LGE) proved it ain't necessarily so. Its April split-up improved corporate governance and boosted the share prices of the new entities.

In the transaction, LGE spun off its core electronics divisions - about 90 percent of the assets - into a new listed entity, also called LG Electronics. The other investments, principally mobile services provider LG Telecom and fixed-line operator Dacom, were demerged into another entity called LG Electronics Investments (LGEI). Those that had invested in the old LGE were given proportional shares in the new companies.

The deal untangled cross-shareholdings, improved transparency and clarified the investment stories of the new companies. For example, fund managers who may have liked the old LGE's successes in consumer electronics, but were turned off by LG Telecom's 3G plans, can now choose to isolate their cash in the new LGE alone.

When investors didn't understand how their money was passed between affiliates, "it was very difficult to value the company properly," says Shaheryar Chishty, vice president at Salomon Smith Barney. "And in the absence of clarity, investors just tended to discount." The demerger gave that clarity, and the effect was immediately visible in the higher market cap of the new companies.

In truth, LG Electronics was glad to be rid of its telecom units as these had dragged on its earnings. "We've invested more than one trillion won [US$780 million] in LGT since 1999 and we haven't been happy about it," confessed LGE's CFO Young-soo Kwon around the time of the demerger.

As expected, LGEI hasn't done so well out of the restructuring. Its share price is down about 65 percent from mid-October 2001, when rumors of the demerger surfaced. Nevertheless, the new companies can now focus on their own enterprises, and investors have a clearer idea of the risks and returns they can get from either entity. Considering the impenetrable inter-group transactions of Korea's chaebol days of yore, the demerger is a giant leap towards accountability.

"This (restructuring) isn't something LG had to do; there was no regulatory driver behind it," says Jongho Park, LGE's VP Finance. "The company is just trying to address the needs of international capital markets, to complement its global marketing strengths with a reputation for strong corporate governance." As LG Group continues to restructure, it aims to show that the sum of the parts can be worth more than the whole. JM

Indofood's issue of US$280 million five-year notes
Financial Advisor: Credit Suisse First Boston

Flashback to 1997. Indofood, one of Indonesia's most respected companies and the world's biggest maker of instant noodles, watched as its world fell apart. The rupiah was sinking and it was taking Indofood's US$1.2 debt down with it. Rioters were looting Chinese-controlled companies. Indofood was targeted and one of its factories was torched. Even the home of CEO Eva Riyanti Hutapea was attacked.

It was crisis Indonesian style, and the timing couldn't have been worse. Early that year, Indofood bought a refinery, plantation and a distribution business, funded by poorly-hedged US dollar loans. Indofood found itself having to finance these with income from a rapidly sinking rupiah. Bankruptcy loomed.

Flashforward to 2002. Indofood has transformed itself from bankruptcy candidate to Indonesia's offshore-markets star, meeting its debt obligations without fail. Since 1999, Indofood has settled about US$800 million of US-dollar debt and about US$230 million worth of rupiah debt, thanks to strong profits and rigorous risk management (more hedging, less expansion).

But doing so was not easy. Last June, Indofood had a US$200 million debt due, and even a month before, deputy CEO Cesar dela Cruz was scrambling for options to avert a liquidity crisis. Local banks had reached their saturation point with previous Indofood refinancing. At worst, dela Cruz could sell assets that were doing well, but he knew refinancing was the most practical way to go.
The result was the largest international bond sale to come out of Indonesia since 1997, and what a surprise it was. Indofood issued US$280 million in five-year notes to highly receptive international investors. About 90 percent of the deal, upsized from US$200 million, was placed offshore and priced at the tighter end of guidance.

The issue ended Indofood's Asian-crisis-induced debt epic. While it still owed US$569 million as of March 2002, the June deal comfortably extended the maturity profile of all existing liabilities. It is profitable and its ratio of EBITDA to consolidated finance charges stands at a manageable 4.2 times.

"They've displayed extreme prudence in ensuring that their foreign currency exposure is better hedged," says Carsten Stoehr, head of Asian debt capital markets for CSFB, sole bookrunner of the deal. "They've focused on showing that they have the right debt composition on their balance sheet."

Says Hutapea: "People will look at us and think we're quite conservative. But I believe Indofood's strong fundamentals sustained us during the crisis. We were able to take care of our commitments, and investors know they can trust us." JM

Bank of China (Hong Kong) IPO
Financial Advisors: UBS Warburg, Goldman Sachs

The idea was so far-fetched it could have come from another galaxy: to float the Hong Kong operations of state-owned Bank of China. To transform this bureaucratic giant into something more capitalistic was like taking socialism out of the People's Republic. But it finally happened in July this year, after almost three years of painstaking restructuring, reforms and lobbying. Needless to say, it wasn't easy.

In the run-up to its IPO, Bank of China (Hong Kong) looked a mess. It had among the lowest net interest income, the highest non-performing loans (NPLs) and the lowest returns on equity (ROE) compared to Hong Kong peers. Worse, the bank played the role of an ATM to "window" companies, or Chinese government funding vehicles that came to Hong Kong in their thousands throughout the 1990s. As a fellow Chinese enterprise, the bank felt obliged to lend to these windows.

"We had a close relationship with the China-related enterprises, window companies in Hong Kong in particular," says Norman Law, CFO of Bank of China (HK). When the Asian crisis took down Hong Kong's property market - the preferred investment of window companies - its NPLs naturally swelled. "Our high NPL legacy is very much related to the Asian financial crisis, and also to this high exposure to China-related entities," Law adds.

The state-oriented credit policy was matched by a socialistic work culture. Nicole Yuen, head of Asian equity corporate finance for UBS Warburg, a joint global coordinator on the deal, describes the bank's pre-IPO culture as one of "everyone eats from the same rice bowl" - a jobs-for-life, company-as-parent culture that inspired tremendous loyalty but little accountability.

"If you read some of the literature that the senior management of Bank of China wrote, it's very moving," says Yuen. "They said, 'We have to move with time, we have to move with the market.'" That may sound like empty rhetoric from any company elsewhere in Asia, but in patriarchal China, it's hardly ever heard. "It's like a father speaking to his son: please help us improve because we are not in good shape," adds Yuen.

Law says this shift in corporate culture was the most difficult part of the restructuring - more difficult than merging 12 affiliate institutions, which required a special legislative bill, or integrating the accounts and IT platforms of the affiliates, or dealing with problem loans. Now, Law says the bank has shifted its focus from market share to ROE, stressing innovation and responsibility over obedience and rote compliance.

These efforts were rewarded. The bank's US$2.5 billion Hong Kong listing marked the largest non-US IPO in 2002. Despite troubled markets, the deal priced at the top of the indicative range on strong demand.

In its interim report post-listing, the bank has reported sharp improvements in all the key numbers: net interest margin, ROE and NPL ratios. But, oddly for a bank merger and restructuring of this size, it has managed all this with minimal layoffs. Does that mean that some of the old thinking still survives? JM

Nissan's joint venture with Dongfeng Motors
Financial advisor: Goldman Sachs

Nissan's deal to take a 50 percent stake in a new JV company with China's third largest automaker adds Asia's sweetest turnaround story to the ongoing saga of the world's fastest transforming market. The company returned to profitability last year after a determined struggle to strip away non-core businesses and improve its finances following its purchase by French automaker Renault in 2000. The deal with Dongfeng Motors is Nissan's first bid to restore its glory in the global market for auto sales.

The road to China is littered with non-profitable auto joint ventures, and on the surface Nissan's Dongfeng deal resembles many other star-crossed JVs. General Motors famously got stuck in a JV with Shanghai Automotive Industry Corp (SAIC) making vehicles unsuited for the Chinese market. Citroen, the French automaker owned by Peugot, has been manufacturing the Fukang sedan with Dongfeng at a loss for nearly 10 years.

The Nissan deal may have skirted some of the dangers. Traditionally, the Chinese government keeps tight control on foreign ownership in the auto sector by requiring time-consuming approvals for each new product. Nissan won a single approval to market up to seven vehicles in the PRC, and the right to set up a research and development unit for new cars - a first.

The US$1.03 billion will be used to free the JV from the debts Dongfeng incurred under state ownership, and to install Nissan's production, distribution and purchasing. The aim is to manufacture 550,000 vehicles a year by 2006, up from Dongfeng's production of 350,000 vehicles, mostly trucks and buses, today.

In cutting the deal, Nissan avoided a perennial trouble-spot. Dongfeng already has other JVs with Peugeot and Honda. The terms hive off these competitive operations into a new company, cancelling out Dongfeng's ability to play one foreign JV partner off against the other. But there may yet be a downside. Carlos Ghosn, the CEO of Renault, personally brokered the deal himself, flying to Wuhan where Dongfeng is based, three times to hammer out the details. He tried, but failed, to gain a controlling 51 percent in the venture.

Ghosn's reputation as a turnaround tsar in the auto industry has hinged upon his ability to change company cultures, slashing costs and installing stringent measures of performance. Nissan CFO Thierry Moulonguet was largely responsible for importing the "Ghosn effect" to Japan. He will now try to make it work for China, without a full measure of control. TL

Celcom Restructuring
Financial advisor: Citibank

The deal to recapitalize Celcom, Malaysia's second largest mobile phone operator, was an ingenious drama of risk and reward played out in the local capital markets. Dramatis personae included Malaysian prime minister Mahathir Mohamad, ousted finance minister Anwar Ibrahim, and a swashbuckling Malaysian tycoon named Tajudin Ramli. It had a deus ex machina, too - ringgit debt and equity investors, who grasped the viability of the plot, and which way the wind was blowing.

The deal was prompted by the Malaysian government, which owned a majority stake in TRI, the conglomerate that owned 100 percent of Celcom, the nation's second largest mobile phone company. The government came by its ownership of TRI in 1999 through a controversial swap of shares for cash with TRI's former chief executive Ramli. At that time, TRI was heavily in debt, and Ramli used the cash from the swap to pay off the debts. That Ramli, the owner, was a friend of Anwar, now ousted as finance minister and jailed, prompted charges of cronyism. Despite losing ownership in TRI, Ramli retained an 18 percent stake in Celcom. Even after Ramli's paydowns, TRI was unable to lift itself out of the red. Early last year, TRI defaulted on some US$375 million in euro-convertible bonds. The danger that debt holders would seize control of Celcom, the most viable unit belonging to TRI, was very real.

So the burning question became: how to save Celcom from being seized? The only way to do it, bankers reckoned, was to craft an offering that would be equally attractive to both bond and equity investors - it would remove a measure of risk and replace it with the possibility of reward. If bond investors in Celcom could be coaxed into helping pay off TRI's obligations, the thinking went, then perhaps equity investors in TRI could be encouraged to inject new equity into the sick parent, ensuring that it would no longer threaten Celcom's survival.

The deal was in fact a complex trade-off of risks, and to succeed, had to be aggressively marketed - and clearly explained - to local investors. Despite the complexity, it went off without a hitch. Citibank arranged the debt offering in the local bond markets, issuing US$289 million in local currency medium-term bonds, US$26 million of commercial paper, and US$171 million of local currency bank debt. From these proceeds, US$375 million went to TRI to clear up its euro-convertible outstandings. Simultaneously, equity investors in TRI were issued a rights offering and restricted stock worth US$421 million - bolstered by the confidence that the bond offering had helped ensure its survival. TL