Arthur Shay April 9 2003 Privatization of Chunghwa Continues Slowly Shay & Partners | Tech, Data, Telecoms & Media - Taiwan Arthur Shay Tech, Data, Telecoms & Media Domestic Offerings Foreign Offerings Proposed Restriction on Buyers Comment Until 1996 Taiwan's telecommunications industry consisted solely of a government bureau which determined policy and provided services. With the passage of Taiwan's Telecommunications Act in 1996, however, the government created the state owned Chunghwa Telecom Company, with the eventual goal of privatization. The process has been slow, but the government is persisting with its plans nonetheless.Domestic Offerings Taiwan's Ministry of Transportation and Communications, which owns the government's shares in Chunghwa, has repeatedly announced that it would sell certain percentages of the outstanding shares by certain dates, and has repeatedly failed to meet these targets. It originally promised to sell 30% of the shares by the end of 2000, but the initial offering in August 2000 went badly with less than 5% of the shares selling, at an issue price of NT$104 (about US$3) a share.Subsequent offerings also failed, with the first substantial sale not occurring until December 2002, when the government sold 13.5% of the shares to a consortium of eight local companies, including several insurance companies and Chunghwa's lead competitor, Taiwan Cellular Corp. Most recently, the government sought investors in a three-day, after-hours auction commencing on March 3 2003. However, while the ministry planned to sell just 100 million shares - roughly 1% of the government's stake - only 7.4% of this target was sold over the three days, at an average price of NT$52, just half the share price of the initial public offering. While Chunghwa is one of Taiwan's most profitable companies and pays regular cash dividends, the ministry has repeatedly been criticized for setting the stock price too high. Tony Teng, the director general of the ministry, has responded: "We want the offering to be a success. But if the floor price is too low, then we will become easy prey to criticism by lawmakers for undervaluing national assets." The government has announced that the next sale will take place in April 2003, when it plans to offer 500 million shares, followed by another offering in the second half of the year of 1 billion shares. Foreign Offerings For years the government has also spoken of its plans to offload shares onto foreign investors through American depositary receipts (ADRs) to be issued on the NASDAQ (National Association of Securities Dealers Automated Quotation) stock exchange. That plan stalled when the ministry postponed the initial floating in January 2001 because it disagreed with the floor offering price suggested by investment bank Goldman Sachs. Subsequent attempts have also failed for various reasons and no ADRs have yet been issued. The government is now speaking of releasing a 13.8% stake in Chunghwa through an ADR offering in the second half of 2003. Proposed Restriction on Buyers The presence of Chunghwa's rival Taiwan Cellular in the group that purchased 13.5% of Chunghwa's shares last December caught the ministry by surprise. Explained Teng: "The ministry didn't expect [that Taiwan Cellular] would participate in the auction and buy the shares. But then all of a sudden [it] just showed up unannounced." As a result, Taiwan Cellular now holds almost 6% of Chunghwa's shares, and should be able to gain one of the 15 seats on Chunghwa's board of directors by acquiring more shares or pooling votes with others in order to gain the required support of 7% of the shareholders.The government now hopes to prevent similar sales in the future. The ministry is working with Taiwan's Fair Trade Commission to draft rules that would require any rival telecommunications operator to obtain government approval before purchasing more than a certain amount of Chunghwa's shares. The exact details of this proposal are not yet known. CommentGiven the global slump in the industry and concerns over terrorism and war with Iraq, these are difficult times in which to privatize a telecommunications company. Last November, China's state owned telephone company, China Telecom, was forced to cut the size of its US$3.7 billion initial public offering in half and delay the offering after institutional investors failed to show sufficient interest.However, Chunghwa is a strong company. It is the only telecommunications operator in Taiwan that provides fixed-line, mobile and internet services, and it holds a 32% share of the domestic mobile phone market, with almost 7.5 million subscribers. It reported a net profit of US$1.25 billion in 2002, up 16% from the year before. It also offers shareholders regular cash dividends averaging between 7% and 9%. Moreover, with a budget deficit of almost US$7 billion, Taiwan's government has ample incentive to sell off its shares.Chunghwa's chairman was replaced in January 2003. New Chairman Hochen Tan, the former vice minister of the Ministry of Transportation and Communications, has stated that his top priority is to meet the government's goals on privatization. These now call for a reduction of the government's stake in Chunghwa to 49% by the end of the year. The government currently owns about 81% of the company. For further information on this topic please contact Arthur Shay or Christopher M Neumeyer at Shay & Partners by telephone (+886 2 8773 3600) or by fax (+886 2 8773 3611) or by email ([email protected] or [email protected]).