20 September 2011 FinanceAsia
Global equity markets clearly remain difficult, but that was not why a sell-down in Taiwan’s TPK Holding was withdrawn on Friday, a little more than one hour after launch. Instead, the bookrunners were forced to cancel the sale after it emerged that the seller, a unit of German plastic components maker Balda, had not made the required filing with the Taiwanese stock exchange in time.
With a stake of about 16.1%, Balda is the largest shareholder and an insider in TPK, which is the main supplier of touch screens to Apple’s iPhones and iPads. Under Taiwanese regulations, a shareholder counts as an insider if it owns at least 10%, or if it is a member of the company’s senior management. And when an insider wants to sell common shares in a company, the company is required to make a filing on behalf of the seller at least three days before the sale. This means the upcoming deal becomes public knowledge and often results in downward pressure on the share price.
No such filing had been made on behalf of Balda when investors started to receive term sheets for a sell-down of between NT$6.29 billion and NT$6.46 billion ($210 million to $216 million) at about 4.15pm on Friday. Sources say that, in theory, if Balda had filed by 5.30pm on Friday, the deal could have been completed after the market closed yesterday — i.e. after the required three days — which would have limited the market exposure to just one trading session. However, a filing was never made and by 5.40pm on Friday investors were told that the deal was withdrawn.
Balda confirmed in a press release later in the evening that it had not filed for a sale, but the wording in the brief statement made it sound like this was by choice — not because it had missed the filing deadline. The release was headlined “Balda squashes rumours of selling TPK shares” and went on to say that “Balda informs that it has not done the necessary filing with the Taiwanese stock exchange to do this kind of transaction due to the current market volatility and the current market price.”
If Balda did make a choice not to go ahead with the agreed transaction, one has to wonder why J.P. Morgan and Nomura — the joint bookrunners — launched the deal. Asia-based sources said that the statement may be an after-construction, however, and argue that Balda and TPK simply missed making the filing. Why that happened is less clear. It is possible that the German seller simply wasn’t aware of the rules, but even if it wasn’t, the bookrunners should have informed it of what needed to be done. They should also have made sure that a filing had been done before sending the term sheet to investors.
At the very least, there was insufficient communication between the seller and the two banks involved, but one can also argue that it was a case of poor execution.
There are several precedents for similar transactions, including a series of sell-downs by Royal Philips Electronics in Taiwan Semiconductor Manufacturing Company (TSMC) between 2003 and 2008. Two recent transactions that required the sellers to make a filing are Baring Private Equity’s sell-down in Airtac in June and Morgan Stanley’s sale of shares in E.Sun Financial in July. No filing is required if the seller is offering global depositary receipts instead of common shares.
Not surprisingly, TPK’s share price fell 5.5% yesterday and the stock is likely to remain under pressure until a transaction has been completed. Balda said it will monitor the market situation and coordinate closely with TPK to “ensure a smooth exit process and to minimise market impact”.
Investors were already aware that the German company intended to reduce its stake in TPK, however, and short-selling activity in the stock had picked up in the past month. The level of short positions currently account for about 2% of the outstanding shares, versus 1% a few weeks ago. In addition to the Balda sale, TPK itself is also planning a sale of GDRs that based on the current share price could be as big as $450 million. It is rumoured that J.P. Morgan and Nomura are mandated for that transaction as well. The two banks also arranged a $400 million convertible bond for TPK in April this year.
At the end of May, following its annual general meeting, Balda said that it intended to sell shares in TPK no later than by the end of October and to distribute an appropriate dividend from the profit achieved through the sale next year.
However, Balda’s share price jumped 8.7% on Friday after the block trade was called off. One reason for this may be that TPK actually accounts for a significant portion of the company’s market value. In fact, based on yesterday’s closing prices, its 16% stake in TPK has a market value of $842 million, while Balda’s entire market capitalisation is only $588 million. The share price gains could be a signal to the management that investors want it to keep the profitable investment.
Even though TPK’s share price has come off from a high of NT$910.48 in May, it is up 215% since the company raised $200 million in an initial public offering in October last year. And analysts continue to like the stock, as evidenced by the fact that their recommendations include 23 “buys”, versus just five “sells”.
Balda lost some of Friday’s gains yesterday, however, as European markets again came under pressure due to concerns about a Greek default. The stock finished down 5.6% at €7.25.
According to the term sheet, Balda was looking to sell a quarter of its TPK stake, or 9.5 million shares, which would have reduced its holding to about 12.1% from 16.1%.
The shares, which are held by its Balda Invest Singapore unit, were offered at a price between NT$662 and NT$680. The range translated into a discount of 2.4% to 5% versus Friday’s closing price of NT$697.
TPK, whose main production site is located in Xiamen in China, has grown rapidly since it was established in 2003, thanks to its partnership with Apple. The inventor of the so-called projected-capacitive (P-Cap) touch technology, the company has worked together with Apple to develop the touch screens for its iPhones and iPads and, while competitors have started to emerge (Apple does need more suppliers to support the consumer demand for its products), TPK’s position as the main supplier of this technology is not in question.