Yesterday it was announced in Taiwan that Cathay Financial Holding Company (FHC) has agreed to purchase United World Chinese Commercial Bank (UWCCB) in an all share transaction. The deal is worth some $3.4 billion and is the largest M&A deal to ever happen in Taiwan, eclipsing last week's acquisition by Fubon of Taipei Bank.
Key facts to the transaction are that Cathay is offering one share for each 1.6 UWCCB shares, giving a valuation premium of 28.7% to UWCCB's closing price last Friday. The new company will have a combined asset value of $62.2 billion and over 10 million customers. It will be the fourth largest financial institution in non Japan, non Australia Asia. JPMorgan advised both sides of the transaction.
FinanceAsia.com caught up with Chang-Ken Lee, executive vice president of Cathay FHC to discuss the terms and rationale behind the deal.
You must be very happy to have concluded this deal. How long have you been working on it?
Chang-Ken Lee: It's been a long process. We started talking to UWCCB last August.
Once Fubon had completed its purchase of Taipei Bank last week was there a lot of pressure on you to come up with a similar transaction?
It's complicated as it was such a long process. In the beginning we felt this should be a friendly deal as Cathay has had a long history of co-operation with UWCCB. Both sides have similar cultures and experiences of working together. So we believed that we could complete the deal in a friendly way. But then some of our competitors felt that [UWCCB] was a good target so there was some competition in the market. That's when it became complicated.
Last October we had reached a consensus to form a financial holding company together but we delayed the completion until yesterday. So I don't know if there was pressure on us [to do the deal] but it has been complicated to get every party comfortable with the issues. We did not want to do some kind of hostile takeover transaction. Taiwan is a small island and we all know each other and we try to do all deals in a friendly way.
Given what you were saying about your competitors buying UWCCB shares, is that why you paid so much for the bank 2.2 times stated book value, 14 times next year's estimated earnings even when UWCCB is going to lose money this year? It looks quite expensive.
If you evaluate it on the book value at the end of June, a 2.2 price to book multiple is expensive compared to the rest of the Asian financial sector. But if you base it on the end of March book value it is actually 1.73 times, which is reasonable. The 2.2 times multiple comes after the huge write off of NPLs [undertaken by UWCCB], so we're getting a much cleaner bank. So now we can focus on the synergies, the revenues and the costs. This is what we will be pursuing. We do not want to spend a lot of time dealing with NPL issues.
You raised $700 million in May through a convertible bond issue with the specific intention of using the money to make acquisitions. Why therefore are you using shares in this deal?
In May one of our competitors tried to purchase the shares [of UWCCB} quite aggressively in the market. And at that time we had just transformed ourselves into an FHC. We did not have any money in the FHC account as we had done a share swap and we were waiting for cash dividends from our subsidiaries. We needed long-term money to buy the shares in the market.
But after we completed the convertible bond, Taiwan's Ministry of Finance (MOF) limited how we could utilize the proceeds of these bonds. The MOF felt that M&A deals should be done in a friendly way, through share swaps. So from that moment until this morning [Tuesday], when the government released new investment guidelines, deals had to be done through share swaps.
The new guidelines this morning say that you can utilize any money in your account for investments. This is interesting because when we negotiated our deal last Friday, we did not have the investment guidelines from the MOF. Also the Minister of Finance has emphasized again and again that any FHC transactions should be a 100% share swap. So we have not had any specific guidelines until today and that is why no one has used cash to complete a deal.
So will you be using the cash you have on your books at the FHC level to buy out Fubon's near 15% stake in UWCCB. Is that now allowed under the new guidelines?
There are two steps. Firstly, Fubon has to be willing to sell its holdings. Secondly if it wants to sell us the holdings at a reasonable price then we can definitely use our convertible bond proceeds to buy these shares as a result of this morning's detailed guidelines from the MOF.
After the merger and the share swap between Cathay and UWCCB, the government will hold 5.8% of Cathay FHC and also have two out of the nine board seats. How should your existing shareholders feel about this sudden government involvement in their company?
State-owned banks together hold a stake of around 27% of UWCCB. After the transaction we will offer two board seats to UWCCB's shareholders. This does not mean any one state owned bank would have a [automatic] delegate on our board. It will be decided by UWCCB's shareholders. The MOF has some regulations and restrictions on state owned banks being board members of financial holding companies, so this has to be discussed with the MOF.
Up to date the state-owned banks have expressed their willingness and interest to keep their holdings after the transaction. But I don't think they will be able to have any involvement in the board meetings or our operations. So I don't need to worry about the government's involvement in our operations.
So you don't think the government will nominate its own people to sit on your board?
According to government regulations, there will be no government people sitting on our board. This is different from the Taipei Bank case.
What will you be using the money for that remains on your books from the convertible bond issue?
So far our subsidiary companies have taken about 30% of the proceeds. And we have a NT$31 billion left on account. So if the Fubon Group is willing to sell its shares in UWCCB, we will be willing to buy them.
Strategically this deal makes a lot of sense for Cathay as it will allow you to really start cross selling. How many products do you sell at the moment per customer within Cathay FHC and how will UWCCB improve that?
I don't have the fully updated figures, but by the end of January we completed a project with McKinsey on the cross selling process. At that time we had 1.3 products for each customer. That means all Cathay FHC customers all had at least 1.3 products from our different entities. But we have had good growth.For instance in credit cards, one and a half years ago we only had 800,000 credit cards. Now we have 1.7 million a huge growth in the last year-and-a-half. And of that growth, Cathay Life has contributed 700,000 credit cards.
Also when we launched our bancassurance business last September, UWCCB was one of the banks carrying our policies. This year Cathay Life is the biggest bancassurance company in terms of premium income and UWCCB contributed 26% of out total premium income. This shows that UWCCB culture and staff are really good. They are willing and able to sell our products. We are confident we can create some quick synergies in revenues.
However, just because we have a bank and they have a bank does not mean there will be huge cost savings. UWCCB is the most efficient bank in Taiwan. Cathay Life has the lowest expense ratio of any life insurance company 5% below the industry average. So we are both efficient operators, so we don't foresee big cost savings. We will be focusing on revenue synergies instead.