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Cablegate: Carlyle Acquires Ta Chong Commercial Bank

VZCZCXRO9569
RR RUEHGH
DE RUEHIN #1646/01 2040836
ZNR UUUUU ZZH
R 230836Z JUL 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6098
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3768
RUEHBJ/AMEMBASSY BEIJING 7043
RUEHUL/AMEMBASSY SEOUL 8779
RUEHGP/AMEMBASSY SINGAPORE 6946
RUEHKO/AMEMBASSY TOKYO 8934
RUEHML/AMEMBASSY MANILA 0104
RUEHJA/AMEMBASSY JAKARTA 4102
RUEHKL/AMEMBASSY KUALA LUMPUR 3782
RUEHHI/AMEMBASSY HANOI 3351
RUEHBY/AMEMBASSY CANBERRA 4561
RUEHWL/AMEMBASSY WELLINGTON 1830
RUEHHK/AMCONSUL HONG KONG 8289
RUEHGH/AMCONSUL SHANGHAI 1237
RUEHGZ/AMCONSUL GUANGZHOU 0414

UNCLAS SECTION 01 OF 02 TAIPEI 001646

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH and Stratford
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/TTYANG
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN AND NY FRB MARIA
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Carlyle Acquires Ta Chong Commercial Bank


SUMMARY
-------

1. The U.S.-based Carlyle group has become the latest foreign
investor to acquire a significant share of equity in a Taiwan bank
by private placement, with half of the required funds obtained from
local sources. Carlyle will participate in the management of the
Taiwan bank. Banking sector M&A will continue, and according to the
financial reform plan, foreign investors will eventually have the
chance to acquire and operate one of the top three Taiwan banks.
END SUMMARY.

Acquisition by Private Placement
--------------------------------

2. In early July, Carlyle beat two private equity funds (i.e., MBK
of South Korea and Affinity of Singapore) in a bid for Ta Chong
Commercial Bank (TCCB). According to a contract signed on July 10,
Carlyle and its investment partners will acquire 36% of TCCB for
NT$21.5 billion (US$651.5 million) by private placement. The
transaction will be completed before the end of September.

Cost Well above Value
---------------------

3. TCCB will issue 588 million common stocks, 235 million special
stocks (convertible to common stocks), and NT$7.5 billion in bank
debentures convertible into common stocks one year after the
issuance to facilitate Carlyle's acquisition. The cost will be
NT$17 (US$0.51) per share, 43% higher than the TCCB share price of
NT$11.5 on July 2-6 or 122% higher than the net worth per share of
NT$7.64. Carlyle will obtain a loan from Taipei Fubon Commercial
Bank to meet over half of the acquisition funding requirement.

Joint Operation
---------------

4. Unlike a September 2006 acquisition in which Standard Charted
de-listed Hsinchu International Bank, Carlyle has assured other TCCB
shareholders that it will not de-list TCCB from the Taiwan Stock
Exchange. Carlyle will obtain seven of the thirteen seats of TCCB's
board of directors. However, Carlyle will allow the incumbent TCCB
chairman and president to retain their positions, although the next
president must be appointed by Carlyle.

Improvement in Bank Quality
---------------------------

5. The additional funds to be contributed by Carlyle and its
partners will further improve TCCB's quality, which is already above
the minimum criteria set by Taiwan's regulators. TCCB's capital
adequacy ratio will increase from 8.7% to 13%, above the 8% minimum
requirement. Bad debt reserves will rise from 44% of total
non-performing loans (NPLs) to over 60%, above the 40% minimum
requirement. Meanwhile, the NPL ratio will decline from 3.3% to
below 2%, compared to a minimum requirement of 5%.

Merger and Acquisition (M&A) Market
-----------------------------------

6. Over the past one and a half years, foreign investors have
acquired eight Taiwan banks:

--In January 2006, GE Consumer Finance (U.S.) acquired 10% of Cosmos
Bank for NT$2,775 million (US$84 million) and has since participated
in the bank's operation.


TAIPEI 00001646 002 OF 002


--In March 2006, New Bridge (U.S.) and Nomura Securities (Japan)
bought 23% of Taishin Financial Holdings (TFH) for NT$31 billion
(US$939 million). The major local shareholder (Thomas Wu) continues
to control and operate TFH.

--In March 2006, Temasek Holdings (Singapore) purchased 6.3% of E.
Sun Financial Holdings (ESFH) for US$133 million. Major local
shareholders continue to operate ESFH.

--In May 2006, Shinsei Bank (Japan) and Integral (a private equity
fund) bought 44.5% of Jih Sun Financial Holdings (JSFH) for NT$12
billion (US$364 million) and since then have installed their own
line managers in JSFH subsidiary Jih Sun International Bank.

--In June 2006, Dai Ichi Mutual Life (Japan) purchased 6.5% of Shin
Kong Financial Holdings (SKFH) for NT$7 billion (US$212 million).

--In September 2006, Standard Chartered (U.K.) acquired 95.4% of
Hsinchu International Bank (HIB) for NT$38.65 billion (US$1.17
billion) and subsequently de-listed HIB from Taiwan's stock market.
Standard Chartered has since become the largest foreign bank in
Taiwan.

--In March 2007, Citibank (U.S.) acquired 100% of Overseas Chinese
Bank (OCB) for NT$40 billion (US$1.2 billion) and subsequently
de-listed the bank from Taiwan's stock market.

--In June 2007, ABN AMRO Bank won a bid to take over the insolvent
Taitung Business Bank (TBB), and Taiwan's Central Deposit Insurance
Corporation (CDIC) will pay ABN AMRO NT$6.9 billion (US$209 million)
as compensation. ABN AMRO will become the third-largest foreign
bank in Taiwan, second to Standard Chartered and Citibank.

7. Two M&A cases have happened among local banks since early last
year. In May 2007, ChinaTrust Commercial Bank (CCB) won a bid to
take over the insolvent Enterprise Bank of Hualien (EBH), and the
CDIC will pay CCB NT$4.49 billion (US$136 million) as compensation.
With the acquisition, CCB has become the largest private bank in
Taiwan in terms of banking offices. In early July, the state-owned
Bank of Taiwan merged with the state-owned Central Trust of China.
After the merger, the new Bank of Taiwan has become the 19th largest
bank in Asia and 114th largest in the world.

Comment
-------

8. Banking sector consolidation will continue to take place as
Taiwan promotes the second stage of financial reform through which
Taiwan authorities will reduce the number of state-owned banks and
encourage financial institutions to merge. Foreign investors remain
competitive in the Taiwan M&A market, since the program has set a
goal to have a foreign investor acquire and operate one of the
largest three banks.

YOUNG

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