Fine-tuning Chunghwa sell-off
Tim Culpan in Taipei
Taiwan looks likely to succeed in pushing through the share sale to boost its coffers
Among the world's democracies, Taiwan is unique. Its political parties define themselves in the context of China's revolutionary past, rather than as champions of a particular economic class or philosophy. But while the bickering between the independence-leaning Democratic Progressive Party (DPP) and opposition Kuomintang continues to centre on relations with communist China, more mundane economic matters occasionally intrude.
One such example is the partial privatisation of Chunghwa Telecom, which the DPP-led government wants to swell its coffers but unions bitterly oppose.
It remains longstanding policy to protect what the Taiwan government deems to be strategic industries, including telecoms. Foreign ownership in Chunghwa is limited to 40 per cent. The limit has the added benefit of creating a perceived scarcity of equity - be it through direct or listed shares - of state-owned firms the government seeks to privatise.
Previous attempts to sell Chunghwa shares both locally and overseas have failed due to pricing, with the government persistently holding out for prices investors have been unwilling to pay.
Foreigners currently hold just less than 23 per cent of Chunghwa's shares, and the planned sale of American depositary receipts (ADRs) will increase foreign ownership to the 40 per cent limit. Foreign shareholders also own 31 per cent of Taiwan Mobile and 30 per cent of Far Eastone, according to data compiled by CLSA.
'If you try to put in an order for a foreign investor [after the Ministry of Transportation and Communications' planned ADR disposal], the system will just reject it,' said Solomon Chang, a sales trader for BNP Paribas in Taipei.
Foreigners wanting a piece of Chunghwa will have to flock to the ADR sale, which the ministry intends to price at a premium to the firm's Taiwan exchange-traded shares. Indeed, Chunghwa's New York-listed ADRs typically trade at a 4-6 per cent premium to their Taiex counterparts, and have traded up to 13 per cent dearer.
'It's a way for the government to sell the shares at a premium and come back and tell everyone it got a good price,' one analyst said.
The sale is of financial and political importance to the Taiwan government, which has committed itself to selling off state assets.
President Chen Shui-bian's administration is trying to shore up an environment of deregulation and reform in order to attract foreign investment. Money raised from the sell-offs also will help plug the government's growing budget debt.
In addition to Chunghwa, the Taiwan government has earmarked Taiwan Tobacco and Liquor Corp, China Steel and a handful of banks for disposal.
This year's budget deficit will be NT$233 billion ($56.7 billon), or 17 per cent of revenues, according to the Directorate General of Budget Accounting and Statistics. That figure is down from the 23 per cent deficit two years ago, with the decline attributable to increases in revenue, including from asset sales.
'The government deficit right now is under control, but it's also a very big issue for the government,' said Chen Shin, an economist with the cabinet-level Council for Economic Planning and Development.
The Chunghwa ADR sale is expected to raise about NT$100 billion for the government, making this placement a crucial part of its budget for the coming year. More importantly, it will help the government begin paying off years of accumulated debt that is forecast to hit NT$3.7 trillion, or 40 per cent of GDP, this year.
'If the government can't sell these assets, then they must find another way to raise funds, such as sell bonds or raise taxes,' Chen Shin said.
Analysts offer differing target prices for Chunghwa's Taiex-traded shares based on estimates of possible job cuts believed to be on the cards after the ADR disposal reduces the ministry's shareholding to less than 50 per cent. Such staff cuts are being bitterly fought by the Chunghwa Telecom Workers' Union, which on Thursday enlisted the support of the US AFL-CIO and Communication Workers Union of America to block the sale.
'Chunghwa and its lead investment banker Goldman Sachs are now asking US regulators to approve a share offering that may be illegal under Taiwanese law,' AFL-CIO secretary-treasurer Richard Trumka said.
But the union action and possible staff cuts might be a red herring given Chunghwa's already efficient operations, said Dominic Grant, a telecoms analyst for Macquarie Securities in Taipei. 'For the past six weeks the unions have been the headline story, but the bottom line is price,' he said.
The Taiwan government, it appears, may finally get the sale it desperately needs at the price it desperately wants.