The Taiwanese government has blocked a plan by Kohlberg Kravis Roberts and the chairman of Taiwan’s Yageo Corporation to take the electronic components manufacturer private in what would have been Asia’s biggest private equity deal this year.
The rejection is a blow to Taiwan’s reputation as a destination for foreign investment, coming after a string of similar rejections or delays imposed by the government on large cross-border mergers and acquisition deals. The most notable example was AIG’s two-year attempt to sell Nan Shan, its Taiwan subsidiary, which is only now nearing completion.
KKR and Pierre Chen, who founded Yageo in 1977, in April offered T$16.10 per share, a 14 per cent premium to Yageo’s undisturbed share price, for the rest of the company. The bid valued Yageo – the world’s biggest maker by sales of chip resistors, which control the voltage passing through a chip – at $1.6bn.
The Investment Commission, which reviews all foreign investment into Taiwan, said it rejected the deal because the acquirers did not give sufficient explanation as to “the protection of investors and shareholders and the fairness of the offer price”.
It also expressed concern about the company’s capital adequacy after the highly leveraged transaction, fearing that it raised the potential of default that would have “serious impact on [Taiwan’s] capital markets.”
But people close to the deal said KKR and Mr Chen had already secured about 70 per cent of Yageo’s shares from the general offer, far above the 50 per cent required by Taiwan regulations to carry out the privatisation. The offer deadline was this Friday, after the government earlier imposed a one-month extension.
CY Huang, chairman of the Taiwan Mergers & Acquisitions and Private Equity Council, an industry body, said the rejection would probably cause other investors to think twice about Taiwan-related deals. Mr Huang estimates there is $3bn-$4bn worth of such deals in the pipeline.
He said the timing of the commission’s move was particularly unfortunate because the improvement in cross-Strait relations over the past two years is now finally attracting investors to Taiwan.
“For the first time in ten years people are getting excited about Taiwan, and now the government does this,” he said. “If you have a legal environment, you should respect the shareholders’ views,” he added, referring to the 70 per cent of Yageo shares the acquirers have received.
KKR and Mr Chen said on Wednesday they would maintain the existing partnership and continue to invest in Yageo despite the government’s rejection, and have not decided whether or not to appeal. KKR and Mr Chen have 30 days to appeal against the decision.
“KKR remains committed fully to its investment in Yageo and its partnership with the company’s leadership and management,” KKR said.
KKR and Mr Chen were interested in taking Yageo private to gain greater flexibility to raise funds and increase research and development investment as the company moves to close the gap with higher-end Japanese component makers.
Mr Chen believes that on a long-term perspective, the new shareholding structure would enable investment in accelerated high-end product development as well as deeper penetration into western markets.
Yageo shares closed down 1.4 per cent at T$13.70 in Taipei trading.