LIFT-OFF
CFO Asia's fifth Deals of the Year awards reveal interesting experiments with hostile takeovers and other fresh approaches.
By Cesar Bacani, Tom Leander, and Jennifer Lee

Talk about elevating the art of the deal. The region's CFOs wheeled and dealt robustly in 2004. Equity transactions in Asia from January to November this year have already topped US$62 billion, 13 percent more than in all of 2003, says Dealogic, which designs software and communication platforms for the capital markets industry. Companies raised US$118.9 billion, up 19 percent, from debt capital markets, while their M&A activities generated nearly 3,000 bids valued at US$124.9 billion, up 18 percent from last year.

Many of the transactions are new to Asia. Six hostile takeovers or unsolicited bids were launched this year - there were none in 2003. Singapore's Temasek succeeded in taking majority control of Neptune Orient Lines, but failed in its two attempts to acquire United Overseas Land. China's Harbin Brewery fended off erstwhile strategic partner SABMiller with help from white knight Anheuser Busch. The other bids - in Hong Kong and Thailand - have yet to be played out.

Cross-border deals intensified, particularly for assets in Australia, China, Indonesia, and Korea. So did securitizations as CFOs began responding to new regulations allowing things like mortgages, non-performing loans, and future earnings from toll roads and bridges to back debt instruments. And despite worries about a hard landing for its overheated economy, China remained a dealmaker's paradise, accounting for a quarter of all M&A activity and equity transactions in Asia.

Will the momentum continue into 2005? We said it last year and we say it again: Long may the good times roll

MERGERS AND ACQUISITIONS

Battle for Harbin Brewery
Financial advisors: ABN AMRO, Anglo Chinese, Morgan Stanley
Eight months into an exclusive strategic partnership with South Africa's SABMiller, and many executives at China's Hong Kong-listed Harbin Brewery remained wary. The Harbin municipal government wasn't too happy either. SABMiller, which controlled 29.4 percent of its crown jewel, was offering what officials thought was too low a price for the 29 percent that the city still owned. In March this year, the municipality sold its stake to newly formed private investor group Global Conduit for HK$3.25 per share - and the stage was set for the first-ever hostile takeover of a Chinese company.

Galvanized by the move, America's Anheuser-Busch, the world's biggest brewer, made a play for the Global stake. On May 1, Harbin Brewery terminated its strategic agreement with SABMiller. The next day, Morgan Stanley-advised Anheuser bought the entire Global stake for HK$3.70 per share (and later made a US$8 million contribution to a trust fund to promote Harbin's economic development). SABMiller, which was advised by ABN AMRO and boutique M&A specialist Anglo Chinese Corporate Finance, struck back with a hostile offer. It proposed to buy all the shares it did not own for HK$4.30 per share.

"With hindsight, we should have taken the initiative and offered a higher price [to the Harbin municipal government]," says James Pearson, ABN AMRO's head of corporate finance. "We made it more expensive for everyone, but the people who benefited most in the end were the shareholders" - which, of course, included client SABMiller. Anheuser's counter-offer was a mouth-watering HK$5.58 per share - 30 percent higher than SABMiller's and far more than SABMiller thought Harbin was worth.

SABMiller sold to its rival and walked away with US$211 million, a cool 143 percent return on an 11-month investment. The windfall came in handy when SABMiller's 49-percent owned CRE Beverage, a joint venture with local conglomerate China Resources, later acquired Lion Nathan's Chinese breweries for US$154 million.

Did Anheuser pay too much? "You have to look at the strategic importance of this transaction, the competitive nature of the bidding process, and the scarcity of such premium assets in China," says Ed King, an executive director at Morgan Stanley's Asia Pacific M&A team. For deep-pocketed Anheuser, US$765 million was a fair price for the rare chance to grab control of a major brewery with a 30 percent market share in China's northeast, a beer-happy region that Anheuser's premium Budweiser brand has yet to penetrate in a big way. Leading brewery Tsingtao, which has granted Anheuser an option to raise its current 9 percent stake to as much as 27 percent, can also benefit from Harbin's network.

It's too early to tell which company made the right call. But the battle for Harbin has blazed a trail for hostile takeovers in China, and showed that the Chinese are open to 100 percent foreign ownership, at least in the food and beverage sector. It also gave the first workout to Hong Kong's takeover code with regard to hostile bids - and proved that the process could, as intended, protect the minority shareholder. CB

Temasek's acquisition of NOL
Financial advisors: Goldman Sachs, HSBC
No outsider can say with certainty what Temasek Holdings had in mind when it began trawling the open market for shares of Neptune Orient Lines (NOL). The stated reason was that Singapore's state investment arm wanted to restore its minority stake to its original level after an NOL capital-raising exercise diluted its holdings to 27 percent. But Temasek's purchases pushed its ownership past the threshold that required it to make an offer for the rest of NOL's shares. It ended up with 68.6 percent of NOL - short of the 90 percent acceptance that would have allowed Temasek to merge the shipping giant with other entities in a consolidation of Singapore's logistics and ports assets, if it so wanted.

Even so, cash-rich Temasek is now spoiled for choice. It can make another stab at buying more shares, scale back its holdings to the 30-percent level and reap capital gains, or retain a big enough chunk to forestall a takeover by another group while maximizing exposure to an enterprise it believes has excellent long-term prospects. And these options were purchased at reasonable cost. At S$2.80 per share, Temasek's offer was equal to 3.2 times last 12 months EBITDA, lower than the average of 5.6 times for completed transactions in the shipping industry. HSBC, which advised NOL's independent directors, concluded that Temasek's offer was "fair" but not "compelling."

Temasek and Goldman Sachs, its advisor, stood firm even after New York money management firm Paulson & Co., which owned 6 percent of NOL, urged management to actively solicit competing bids. (NOL did not act on the request.) In its cash offer, Goldman Sachs noted that the offer price represented a premium of 7.2 percent to the last transacted stock price adjusted for an interim dividend, and 35.1 percent to the weighted average over the last six months.

In the end, Temasek paid more than S$1.6 billion (US$974 million) for 581 million shares and 15 million options. Norwegian shipping magnate John Fredriksen, who was rumored to be planning a takeover try of NOL, sold his 5 percent stake, but later bought back around 3 percent. The stock price has hovered around the S$2.90 level since the deal closed in September. If nothing else, Temasek has done minority shareholders (and itself) a favor by opening the market's eyes to NOL's prospects. CB

HSBC's acquisition of a stake in Bank of Communications
Financial advisors: Goldman Sachs, HSBC
You know you're screwed when non-performing loans comprise 12.5 percent of your total lending - and the government, your major stockholder, fails to include you in its recapitalization exercise. Bank of Communications (BoCom), China's fifth-largest financial institution, was trying to sell a stake to a strategic investor when news broke in December last year that Beijing would inject new money only in Bank of China and China Construction Bank. No one would buy into BoCom without a recap and a resolution of its NPL overhang.

But BoCom refused to give up. "We wondered what was going to happen, but we all knew that the government understood how important the transaction was," says Frank Yu, executive director of the financial institutions group at BoCom advisor Goldman Sachs. Earlier this year, BoCom finally received US$2.3 billion in new equity. Bad loans with a total face value of US$6.4 billion were also transferred to a state-owned asset management company, paring BoCom's NPL ratio to 3.43 percent. Soon after, in August, HSBC purchased 19.9 percent of BoCom for US$1.75 billion, improving the bank's capital adequacy ratio from a dismal 4.4 percent in 2003 to 11.62 percent.

Critics charge that the global bank is throwing good money after bad. "Adequate due diligence was done by the whole team of advisors [including lawyers and accountants] to the point where people were comfortable to be able to make recommendations," responds Soo Lik Keoy of HSBC Corporate Finance, which advised HSBC. It's not as if HSBC and its advisor are complete rubes in today's China. The bank has opened ten branches there since 2000. It paid US$66 million in 2001 for 8 percent of 98-branch Bank of Shanghai and US$600 million in 2002 for 10 percent of Ping An Insurance.

A string of scandals shook BoCom in 2004, including the alleged faking of documents at a northeast branch to support the write-off of US$24.2 million in non-performing loans. But HSBC decided that the risks were manageable given the reforms that Goldman helped BoCom implement from 2001 onwards, including centralization of the risk management system and making the books conform with International Accounting Standards. Under the deal, HSBC got two seats on BoCom's 18-member board and an arrangement to second managerial and technical staff to help improve BoCom's operations.

For HSBC, the attraction is BoCom's 20 million retail customers and 600,000 corporate clients served by over 2,700 branches in more than 130 cities. It has already negotiated an early payback with the establishment of a co-branded credit card business, giving HSBC a head start for the time in 2006 when China promises to open credit cards to foreign banks.

For BoCom, the HSBC connection provides some level of comfort to other investors as the Chinese bank prepares to list in 2005. Troubled as they are, China's other major banks may benefit too. "Other foreign banks are getting anxious because HSBC is getting further ahead of them in China," says Goldman's Yu. "The BoCom transaction is stimulating interest in the Big Four, while pushing them and other major banks to accelerate the pace of their internal reforms." CB

TCL's joint ventures with Thomson and Alcatel
Financial advisor: Morgan Stanley
"Can you imagine running a French company in France?" a Western management consultant joked when he heard that China's TCL International was taking over the television assets of French multinational Thomson. "I'd rather manage a joint venture in Shenyang, and God knows how tough that is." As it turned out, the TCL group not only won control of Thomson's TV and DVD manufacturing and other interests in France and elsewhere in 2003. This year, mobile phone unit TCL Communications also took over the handset and telecom equipment assets of Alcatel, another French multinational.

Both deals were structured as joint ventures into which the two parties injected assets in return for shares. In each case, TCL made sure it was in the driver's seat. Established in July this year, TCL-Thomson Electronics is 67 percent-owned by TCL International. Under the terms of the TCL-Alcatel deal, which closed this November, TCL Communications will own 55 percent of the venture in exchange for 55 million euros in cash. The French will control 45 percent after injecting 45 million euros and its existing mobile handset business, essentially valuing the non-cash portion at zero.

TCL's aim is to vault into the big leagues without spending too much time and money. "About two years ago, we started rethinking the business model of being an original equipment manufacturer for multinational companies," TCL-Thomson CFO Vincent Yan told CFO Asia earlier this year. "But it's just not realistic to build a new brand in a mature market like North America. You just don't have the kind of profit margin for that." With Thomson, TCL gets established brands in Europe and the US - the French group bought American icon RCA from General Electric in 1987 - and ready-made distribution and service networks.

TCL has been criticized for agreeing to inject up to 140 million euros in working capital into TCL-Thomson while Thomson puts in no cash. But Yan says the money is a snip compared with the US$500 million a year that Samsung is reportedly spending to grow its brand in the US. "And we're getting a 67 percent stake in the JV while Thomson gets 33 percent," Yan adds. "That's because our business is profitable while some of Thomson's businesses are losing money." Going by pure valuation, the ownership ratio should have been 57 percent for TCL and 43 percent for Thomson.

Sources say the negotiations turned testy at times. In contrast, the talks with money-losing Alcatel were considerably more cordial, perhaps because the Thomson deal had already set a precedent in structure and pricing. Alcatel has an established brand, handset patents, telecom carrier relationships in Europe and Latin America, and some 600 R&D, sales, and marketing professionals, which are assets that complement TCL Mobile's original design manufacturing capabilities and distribution reach in China.

Both Thomson and Alcatel have the option to swap their shares for minority stakes in TCL International and TCL Mobile, respectively, after which the joint ventures will be folded into the two TCL companies. The French will thus become passive investors. The challenge for the Chinese is to prove that they can run the Western parts of their global business as well as they do those at home. CB

Singapore Power's acquisition of TXU Australia
Financial advisors: Credit Suisse First Boston, Morgan Stanley
China Huaneng Group's acquisition of OzGen
Financial advisor: Deutsche Bank
Deregulate and they will come. True enough, Australia's power sector is now one of the world's most competitive industries after regulators relaxed foreign-ownership restrictions. This year, Singapore Power emerged as the country's largest private-sector utility player with its A$5.1 billion (US$3.9 billion) purchase of TXU Australia. China Huaneng Power, in its first-ever foreign acquisition, started small by paying A$315 million (US$246 million) for 50 percent of OzGen, the Australian power generation subsidiary of Shell-Bechtel venture InterGen. It is now looking to buy the other 50 percent.

The two acquisitions are part of an intensifying trend of cross-border deals in Asia, a wave that in 2004 included Citigroup's US$2.6-billion takeover of Korea's Koram Bank. Singapore Power is a pioneer here, having bought Australian electricity transmission grid SPI PowerNet in 2000. Since then, investment bankers automatically think of the cash-rich company as a potential buyer whenever an Australian utility goes on the block.

Advised by Morgan Stanley, Singapore Power persuaded TXU Corporation to negotiate with it exclusively, although TXU advisor CSFB did line up at least one other bidder that camped out in TXU's Dallas offices in case the talks with Singapore Power fell apart. They didn't. The two sides came to an agreement in just 18 days. The speed raised questions about Singapore Power overpaying in its eagerness to acquire - the sale price was 8.5 percent higher than the A$4.7 billion (US$3.6 billion) analysts expected an IPO would value TXU Australia.

"The IPO valuation is always very different from valuation where you acquire strategic control of an asset," says Morgan Stanley's Gokul Laroia. A better measurement would be the valuation of listed utilities in Australia. Laroia notes that the price Singapore Power paid was at a discount to the trading value of those stocks.

China Huaneng Group, China's largest independent power producer, never came up in all the discussions about potential purchasers of TXU Australia. Understandably so - China's largest independent power producer set up a subsidiary to do overseas acquisitions only last year. But Huaneng hit the ground running with its successful bid for half of OzGen, a remarkable feat given that it was late to the party. Other bidders were well into the process when Huaneng's new overseas acquisition office got the go-ahead from headquarters to join the contest.

The latecomer proceeded to impress OzGen engineers. One of the utility's coal-fired plants was experiencing vibration problems. The Chinese technicians doing due diligence said Huaneng experienced the same problem back home and suggested ways to fix it. The other bidders were told about the vibrations too, and so adjusted their bids downward to account for any repair work. Convinced that the problem was easily solved, however, Huaneng made a slightly more aggressive offer. And so in one swoop, China Huaneng Group made itself a contender for the time another Australian power asset comes into play. CB

EQUITY

Woori Financial Group's block sale and acquisition of LGIS
Financial advisors: Credit Suisse First Boston, Lehman Brothers
Nothing concentrates the mind faster than a looming deadline. That facing state-owned Korea Deposit Insurance Corp. (KDIC) is particularly stringent. The law requires the agency to fully dispose of all its shares in Woori Financial Group by March 2005. In September this year, with the deadline just six months away, KDIC still owned 87 percent of Woori, Korea's third-largest financial banking group. So KDIC jumped at a chance to undertake a rapid-fire block sale on September 13. Priced at 7,200 won per share, a 3.1 percent discount to the previous day's close, the secondary offering to institutional investors was several times oversubscribed after only five hours.

Shepherded by CSFB, Lehman Brothers and two Korean brokerages, the transaction capitalized on a re-rating of Korean banking stocks, which saw Woori rebound from a three-month low. Woori was also riding a buzz created by the resolution of the LG Card crisis (Woori was a creditor) and the entry of a new management team led by Hwang Young Ki, who previously headed Samsung Securities. The warm response led KDIC to upsize the block sale, but only slightly. A previous debt issue would morph into an exchangeable bond if the free float were to top US$1 billion, potentially complicating Woori's full privatization.

In the end, KDIC disposed of 5.7 percent of its holdings for US$281.8 million, substantial enough to forestall complaints it was dissipating government assets, but low enough to avoid triggering the exchangeable-bond option. That issue expires in January next year, so KDIC will have a freer hand in disposing of the 80.2 percent of Woori it continues to hold. The bank's higher profile among foreign investors as a result of the September block sale and the stock's improved 19.8 percent free float are seen as positives for future dispositions.

Woori's acquisition of a 21.2 percent stake in LG Investment & Securities (LGIS) could prove to be a positive too. Combined with mid-sized Woori Securities, No. 2 brokerage LGIS vaults Woori to the top of Korea's US$3.3 billion securities market. Woori paid US$259 million for the stake, edging out Taiwan's Yantua Securities. It was a reasonable price, all things considered, given that the relatively small stake was enough to give Woori management control.

Before the management change at Woori, there could have been questions about the bank's ability to realize LGIS's full potential. But with former top stockbroker Hwang at Woori's helm, the chances are greater that LGIS could really add value to the entire company. The ball is now in KDIC's court as everyone watches to see how it will make use of all these positive developments to meet its March 2005 deadline. CB

DEBT

ICBC's securitization of non-performing loans
Financial advisor: Credit Suisse First Boston
This is the question facing China's biggest state-owned banks: What to do with the estimated US$500 billion in non-performing and sub-performing loans on their books? The financial sector will be opened to foreign competition in 2006 and Chinese banks are under pressure to strengthen their bottom lines by doing an IPO. But how could they attract investor interest with the NPL sword hanging over their head?

In 2004, Industrial & Commercial Bank of China (ICBC), the country's largest bank, made a small dent towards resolving the problem. Twenty-five percent, according to Standard & Poor's, of its balance sheet was tied up in NPLs, a good way off its target of 15 percent. In the first deal of its kind by a bank in China, ICBC securitized 2.6 billion renminbi (US$314 million) of its NPLs - less than 1 percent of the total - to create three classes of certificates with a total face value of 820 million renminbi (US$99 million, a 69 percent haircut) that were sold to domestic investors between April and June of this year.

The transaction required creative thinking on the part of ICBC advisor Credit Suisse First Boston. Under Chinese law, banks cannot sell NPLs directly to investors, only to four asset management companies created by the government in 1999. So the ICBC issue was structured in such a way that the NPLs were transferred to a trust, which then assigned the beneficial rights - whatever money is recovered from the debtors - to the investors who bought the certificates. The beneficial rights were rated by domestic ratings agencies China Chengxin and Dagong Credit.

All of the NPLs came from ICBC's branches in wealthy Ningbo, south of Shanghai. These units have a good reputation for recovering NPLs, says Victor Su, vice president of CSFB's strategic transaction group. They also had a big enough volume of bad loans for nearly all to be included in the offering, forestalling any accusation that ICBC was cherry-picking NPLs. The total portfolio consisted of 864 loans from 232 borrowers, 96 percent of which had some form of collateral or guarantee.

The Class A Senior Trust Certificates and Class B Junior Trust Certificates were both rated triple A, but the senior tranche has first priority over proceeds of the NPL resolutions, although it is not guaranteed by the bank. The junior tranche is second in line as recipient, but it enjoys the bank's guarantee. The third, Class C, is neither rated nor covered by any guarantee.

The issue was fully taken up by domestic institutions, with pricing for the unguaranteed Class A significantly tighter than that for Class B, indicating a level of investor comfort with the steep discount and ICBC's ability to collect on the loans. The bond issue is a drop in the bucket, to be sure, but every little bit helps in the task of cleaning up the banking system's soured loans. JL

Optimal Group's dual-currency bond and loan
Financial advisor: HSBC
Since charging interest is forbidden by the Koran, Islamic 'bonds' allow lenders to be paid for the risk of investing in a deal without resorting to interest. One such vehicle, common in Malaysia, is al-bai bithaman ajil, which translates as 'deferred payment scheme' and, in its most common form, is used in the property market. The instrument allows for repayments to be fixed at the outset, with a rate of profit ensured to the lender. This - and similar - vehicles are now being deployed to tap home-grown capital within Malaysia, an important advance in the development of the region's capital markets.

September's Optimal dual offering of syndicated loans worth US$468 million dollars and Islamic debt worth 1.27 billion ringgit (in a total deal worth US$802 million) set a new benchmark for Islamic offerings in Malaysia. "Investors are getting more comfortable with the [Islamic] structure," says Wynce Low, associate director, debt finance and advisory, at HSBC in Malaysia. "We attracted almost everybody in town."

The offering was launched to pay back loans by the major investors in the Optimal Group of Companies, which include Optimal Olefins, Optimal Glycols, and Optimal Chemicals, owned by Petronas, the Malaysian state-owned oil giant, US-based Dow Chemicals, and an investment unit of Sasol, the South African oil company.

While all are interdependent businesses, only Optimal Olefins was in the pink of health, while Glycols and Chemicals had experienced cashflow problems in the past. The challenge was to avoid having a credit event in one Optimal company affect the financial standing of the others. HSBC recommended that the less robust Glycols and Chemicals units be financed jointly as a single entity, reasoning that the combined companies would have greater financial resources. Olefins would be financed on a standalone basis. Petronas, Dow, and Sasol were offered limited recourse in the form of cash deficiency support, or the ability to tap the company's cashflow to pay interest (no like structure was needed to sweeten the deal for the Olefins unit). Following an exhaustive due diligence, Low says that HSBC was able to convince US-dollar lenders and Malaysia's domestic rating agency that the deal could be financed without guarantees from the three sponsors.

Why was the funding diversified into dollars and ringgit portions? For one, Dow Chemicals eschewed taking on Malaysian currency risk. Another reason is that the two currencies provide a natural hedge against each other in the event of future currency fluctuations (although for now the Malaysian currency remains pegged at 3.8 ringgit to the US dollar, the government could allow it to appreciate).

Ready to go, even the bankers were surprised by the demand for the Islamic securities, causing them to revise the pricing downward during book-building. The 'everyone in town' referred to by Low included 5,887 investors in an order book that included 2,780 financial institutions, 1,190 funds, and 70 corporations. Clearly, the advocates of the utility of Islamic financing had carried the day. The coup de grace - the deal was priced within hours of the US Federal Reserve Open Market Committee hike in rates by 25 basis points of September 21, avoiding upward pressure and a higher price tag for Optimal." TL