China Development Financial Holding Corp’s (中華開發金控) offer to acquire KGI Securities Co (凱基證券) is unlikely to negatively affect the latter’s credit rating, instead, it is likely to start another round of consolidation in the brokerage sector, Fitch Ratings Ltd said yesterday.
“Based on the proposed terms and conditions of the acquisition offer, Fitch believes that KGI and China Development Financial will be able to sustain their standalone financial strength,” Fitch said in a statement. “The merger should generate scale benefits over the medium to long term, enhancing [the] earnings quality of the merged entity.”
According to Fitch, KGI Securities has an issuer default rating of “BBB” with a stable outlook.
On Thursday last week, China Development Financial announced plans to acquire between 1.64 billion and 3.27 billion common shares, or between 50.1 percent and 100 percent, of KGI Securities on the open market.
Under the tender offer, each KGI share will be exchanged for 1.2 of China Development Financial’s new common shares and NT$5.5 in cash, according to a filing to the Taiwan Stock Exchange.
With the tender period expected to start early next month, gaining shareholders’ approval on June 22 and receiving the go-ahead from the Financial Supervisory Commission, China Development Financial plans to make KGI Securities its wholly owned subsidiary and then integrate it with its brokerage subsidiary, Grand Cathay Securities Corp (大華證券).
A successful merger between KGI Securities and Grand Cathay will make the new brokerage entity the largest stock and bond underwriter in Taiwan. The deal will also help solidify the new entity’s second place position in the nation’s margin trading and stock brokerage business after Yuanta Securities Corp (元大證券).
Fitch said after the acquisition, investment banking-centric China Development Financial will likely shift its business focus from principal investments to an expanded and more diversified brokerage business.
That “should enhance the earnings stability of the group,” the agency said.
On Monday, Taiwan Ratings Corp (中華信評) placed China Development Financial on its “credit watch” with negative implications, citing capital strength concerns.