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The island20/09/2006. Source: Asia Private Equity Review (APER).
 An extraordinary development is taking place on the private equity map of Greater China, says the Asia Private Equity Review. The island of Taiwan, which has become increasingly isolated on the global political scene and is enveloped in domestic political turmoil, has surprised sceptics and emerged as a new focus for private equity heavy weights.
At the end of August, Taiwan had not only recorded a transaction total of over US$2.4 billion committed by foreign private equity houses since the beginning of the year (fig. 6), but also witnessed their frenzied interest in China Network Systems, the island’s largest cable TV service provider. If the deal is materialised, it will add an approximate US$1.5 billion to the lofty transaction sum that Taiwan boasts thus far this year. Significantly, however, despite being shrouded by uncertainty on its political future, foreign investors did not appear to have factored in any discount in their valuation of assets in Taiwan.
Arrival of Foreign Investors
Since 2001, Taiwan had been able to attract commitments from only a handful of foreign private equity firms. In the five years ending 2005, there were 19 deals recorded that added up to a modest transaction total of US$319.76 million. The US$50 million investment made by American International Group’s AIG Opportunity Fund, to Pishiang Machinery Co. Ltd., was by far the largest during this 60-month period, in which the average deal size was US$16.3 million.
The pattern changed dramatically at the beginning of this year, when Newbridge Capital made its debut investment in the island. The NT$27 billion pledge of capital was not only the largest, but was also the first public equity investment made by a private equity firm in the island. Newbridge Capital’s ground-breaking move into Taiwan was the prelude to a flurry of activity and high profile deals that have come to captivate the Asian private equity community. In just a fleeting seven months, Taiwan has been catapulted to join the leading league of private equity markets in Asia.
The Defining Deals
It was, however, the impressive exit performances of two media assets - Eastern Multimedia Corp. (‘EMC’) and Taiwan Broadband Communications (‘TBC’) - which took place only months apart, that defined Taiwan’s new position in Asian private equity.
In late January, weeks after Newbridge Capital had made its commitment to Taishin Financial Holdings, Australia’s Macquarie Bank and its Macquarie Media Group (‘Macquarie Group’) announced their plans to acquire TBC from The Carlyle Group (‘Carlyle’). The buyer appraised TBC’s enterprise value at A$1,189 million (US$901 million), while Macquarie Group’s purchase price was A$690 million. Based on a statement from the Department of Investment Services, of Taiwan’s Ministry of Economic Affairs, that Carlyle “had originally invested US$200 million” in its purchase of TBC’s stock back in July 1999, the seller has made an envious cash-on-cash multiple of 2.5 times.
Bolstered by the rich rewards derived from its sale of TBC, Carlyle immediately turned to pursue another piece of media assets in Taiwan before the ink was dry on the sale agreement of TBC. The target was EMC, the island’s second largest cable TV operator.
Interestingly, EMC owes its growth and expansion to private equity. It first received funds from the Singaporebased Transpac Capital in 1998, which has since ceased its investment programme. In the following year, EMC received an approximate US$82.5 million from both Capital International, as well as AIDEC. Since then, both Capital International and AIDEC have sold their holdings in EMC, while Transpac Capital held on to its interest.
When Carlyle took control of EMC in July as well as assuming substantial equity positions in an EMC’s affiliate, the transaction sum amounted to an awesome US$1.5 billion. It was not only the largest private equity deal on record for Taiwan, but also the fourth largest transaction thus far in the year.
To foreign private equity investors, Taiwan’s cable TV industry holds strong promise for a rosy future.
Macquarie Group’s purchase price for TBC represents an EBITDA (earning before interest, tax, depreciation and amortization) multiple of 9.4 times (based on annualised earnings for the nine months ending 30th September 2005). According to market sources, the multiple that Carlyle paid for its acquisition of EMC and its affiliated units was 9.2 times EMC’s 2005 EBITDA (fig.7).
Waiting for the Blessed Moment
With foreign investors’ insatiable appetite for deals, it is not unrealistic for China Network Systems, the largest cable TV services provider in Taiwan, to expect generous offer prices from interested buyers. According to Taiwan’s Economic Daily, China Network Systems has received expressions of interest from CVC Asia Pacific, Macquarie Bank, Newbridge Capital, Goldman Sachs, MBK Partners, as well as Kohlberg Kravis Roberts & Co..The transaction price is expected to exceed US$1.3 billion, as the six bidders fought to win ownership by raising their respective offer prices.
In fact, the price is so irresistibly attractive that even News Corp, which holds a 20% stake in China Network Systems through its STAR TV, has decided to sell its holdings in order to reap a windfall. Another possible deal that could spark off yet another round of interest is Tong Lung Metal Industry Co. in which HSBC Private Equity (Asia) holds a 71% equity stake. After having taken control of the lock maker for more than six years, according to market sources HSBC Private Equity (Asia) is interested to realise this investment.
Observation
Thanks to the avalanche of funds pouring into the Asian private equity market that is thus eagerly seeking deployment opportunities, Taiwan is experiencing a sudden shower of interest from global private equity investors. In the 18 months ending June this year, Asian private equity welcomed an additional US$28.8 billion of fresh capital. Notwithstanding, this amount has not yet taken into account allocations that global funds have been directing to Asia. Centre for Asia Private Equity Research estimated that there is a surplus of US$9.6 billion of private equity funds waiting to be deployed (fig.8). As long as Asian private equity is awash with capital, and Taiwan’s regulators are friendly to foreign investors, it will not be an isolated island at least on the private equity globe.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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