Tuesday, December 15, 2009

RPT-DEALTALK-Political hurdles may slow China-Taiwan bank M&A

(Repeats story to additional subscribers with no changes to text)

Stocks | Mergers & Acquisitions | Private Capital

* Momentum rises for deals, but political pressure also up

* Cathay, Chinatrust seen targets for Chinese banks-sources

* Most talks for tie-ups are still in early stages - sources

* Chinese banks can easily afford to buy Taiwan rivals (For more Reuters DEALTALKs, click [DEALTALK/])

By Faith Hung and Michael Flaherty

TAIPEI/HONG KONG, Dec 15 (Reuters) - Momentum is building for Chinese banks to link up with Taiwan lenders. What's also building is political pressure in the island to restrain such deals.

A recent agreement signed by China and Taiwan, and an impending trade pact set for early next year may have finally opened the door to real mergers and acquisitions possibilities for the former enemies, with the focus on the financial sector for now.

But if the experience of a Hong Kong consortium to buy AIG's (AIG.N) Taiwanese life insurance unit is any indication, the political obstacles to prevent cross-strait dealings remain as big as the investment opportunities themselves, which could slow the dealmaking.

"The only downside would be the political risk. If the China-friendly ruling Kuomintang Party loses elections, Taiwan-China ties could be jeopardised," said Kevin Yang, chief investment officer of Paradigm Asset Management.

Most discussions are still in very early stages, with state-owned Chinese banks talking to major Taiwan players such as Cathay Financial (2882.TW) and Yuanta Securities. [ID:nHKG137367] [ID:nTP198616]

Cosmos Bank (2837.TW), majority owned by SAC Capital, EnTie Bank (2849.TW), controlled by Longreach and Carlyle Group's Ta Chong Bank (2847.TW) are also likely to seek Chinese buyers, according to two investment banking sources in Hong Kong and Taipei.

Taishin Financial (2887.TW), Chinatrust Financial (2891.TW) and Sinopac Financial (2890.TW) are also possible targets for Chinese banks to acquire, said two other investment banking sources in Taipei. None of the sources wanted to be identified as they are not authorized to talk to the media.

Private equity firms SAC, Longreach and Carlyle [CYL.UL] declined to comment. Taishin, Chinatrust and Sinopac also declined to comment.

Fubon Financial (2881.TW) was among the five bidders for Morgan Stanley's (MS.N) stake in Chinese investment bank CICC, people familiar with the matter said early this month, in a deal that could be worth more than $1 billion. [ID:nHKG180237]


China-Taiwan bank tie-ups may make sense on paper, but that ignores the lingering distrust between the two sides.

The $2.2 billion sale of AIG's Taiwan Nan Shan unit to the China Strategic (0235.HK)-Primus consortium is in jeopardy because Taiwanese politicians are suspicious of the consortium's connections to Chinese investors, who are currently barred from investing in Taiwan's financial services industry.

The consortium said in December it intended to resubmit its application to the Taiwan government, which came after political pressure mounted on the island's regulators about granting approval to the deal. [ID:nHKG182972]

"The regulators' biggest concern is that China Strategic or Primus are backed by China-sourced funds," said Chu Yen-min, a vice president at KGI Securities. "It is really hard to tell if the deal will be approved."

The China-friendly ruling party lost its support in a major local election this month, possibly weighing on cross-strait dealmaking.

"There would continue to be pressure from opposition parties," Chu said. "But in the long term, there should not be a major shift in Taiwan's China policy."

Taiwan is set to elect chiefs of five major cities in 2010 and to hold a presidential election in 2012.

The expectation is that China will not be given the green light to go and buy up Taiwanese banks, rather, they'll be given the okay to take stakes in the groups, in the 20 to 40 percent range.

Once on the brink of war, China-Taiwan trade relations have thawed since President Ma Ying-jeou took office last year, with bilateral deals promoting tourism and shipping links already concluded.

(For a TAKE A LOOK on the financial services pact, double-click [ID:nTP165902])


China is home to some of the world's biggest banks by market value, meaning they can enter Taiwan, Asia's fourth biggest banking market, relatively cheaply to buy local industry leaders that are just a fraction of their size.

"It would be a very good deal for Chinese banks," said Dan Chang, Yuanta Securities' chief financial officer, speaking generally about the potential and specifically about Yuanta.

A 20 percent stake of Cathay Financial is worth about $3.5 billion, which ICBC could easily own as it accounts for just 1.5 percent of its market value, analysts said.

The growing interest from Chinese banks also offers a convenient opportunity for private equity firms, such as Newbridge Capital [NB.UL], Carlyle and SAC to exit their money-losing bank investments in Taiwan.

"It is a Chinese government policy to encourage mainland banks to buy Taiwanese lenders," said Andrew Wang, chief investment officer of Manulife (MFC.TO) Asset Management in Taiwan. "For China, that is politically significant." (Additional reporting by Michael Wei in Beijing; Editing by Doug Young and Muralikumar Anantharaman)


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