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Taishin Financial's shares plummet

Taishin Financial Holding Co (台新金控) yesterday recorded net sales of 88 million shares by foreign investors on the local bourse, the highest amount among all of the nation's publicly traded stocks, after the company decided to buy a 22 percent stake in state-run Chang Hwa Commercial Bank (彰化銀行) for a total of NT$36.6 billion on Friday.

Taishin Financial's shares plunged by 3.98 percent to close at NT$26.55 on the Taiwan Stock Exchange yesterday, while Chang Hwa shares closed limit-up at NT$18.60 per share.

Meanwhile, BNP Paribas Securities Taiwan Co suggested that investors should dump Taishin Financial shares on concerns over the holding company's potential hefty investment losses in the deal.

"We downgrade [Taishin Financial] to Reduce [from Neutral] on its merger-and-acquisition sunken costs of NT$10 billion," BNP Paribas Securities Taiwan's head of research Jesse Wang (王嘉樞) said in a report released yesterday.

Taishin last Friday outbid six rivals with an offer of NT$26.12 per share to buy Chang Hwa's 1.4 billion new preferred shares. The financial holding company's offer is equivalent to a premium of over 40 percent on Chang Hwa's floor price of NT$17.89 per share, and a premium of more than 200 percent over the bank's net value of NT$12.31 per share.

The analyst predicted Taishin would either book an investment loss amounting to NT$10 billion if it fails to acquire Chang Hwa, or write off its shareholders' value by the same amount if it takes over the bank by the third quarter of 2008 -- on the assumption that Chang Hwa shares are fairly valued at the current price of NT$18.6 per share.

"The lower the fair value of Chang Hwa shares, the higher the sunken costs will be," Wang said.

The French securities house also cut its target price for Taishin to NT$24.4 per share, down 8 percent from the previous forecast of NT$26.5 per share, to reflect the possible considerable losses.

But Taishin believes the share purchase is a good deal.

"The move could help Taishin Financial be one of the survivors of the government's move to halve the number of Taiwan's financial holding companies to seven [by the end of next year]," the financial conglomerate's president Julius Chen (陳淮舟) told a media briefing yesterday.

To ease market concerns, Chen reiterated that the company is expected to become Taiwan's second-largest financial holding firm, up from the eighth-largest currently, with total assets worth NT$2.1 trillion and a market share of over 8 percent. Their banking arm, Taishin International Bank (台新銀行), will have 270 branches nationwide -- the largest number of outlets of all financial institutions -- after it acquires Chang Hwa.

However, analysts seemed less bullish and BNP Paribas said they were not sure if Taishin Financial could take over Chang Hwa successfully because of execution risks, including corporate governance issues and the price expectations of both legislators -- who would review the government's sale of its approximately 18 percent stake in the state bank -- and Chang Hwa's retail investors.

"It's still too early for investors to factor in a potential synergy upside, as it remains questionable whether Taishin Financial is able to conclude this transaction successfully," Wang said.

Similarly, Morgan Stanley's analyst Lily Choi yesterday also cut the target price for Taishin to NT$23.9 per share, down 2 percent from NT$24.5 previously, and reduced its earnings estimates for the firm by 2 percent to NT$2.75 per share this year, and 5 percent to NT$2.02 per share next year.

Choi attributed the changes to their concern that the high-priced deal may hurt Taishin Financial's share price, and that the com-pany's ability to complete a takeover on more favorable terms without significant controversy is questionable.

Taishin reported net earnings of NT$5.75 billion, or 1.35 per share, in the first half of this year, down from NT$6.12 billion, or NT$1.61 per share, a year ago.
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