Carlyle joins parade of Taiwan bank exits: sources

HONG KONG Fri Feb 17, 2012 4:56am EST

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HONG KONG (Reuters) - Carlyle Group CYL.UL has begun the process of selling its over $300 million stake in Taiwan's Ta Chong Bank Ltd (2847.TW), sources said, as it joins other private equity firms in looking to exit the island's low-margin financial sector.

Washington, D.C.-based Carlyle has invited investment banks to make pitches to win advisory roles for the process, according to one source with direct knowledge of the matter. The so-called beauty parade is expected to take place next month, said the source.

Carlyle bought the stake in 2007 for $729 million. Taiwan's competitive, fragmented banking market has never produced the returns investors such as Carlyle had sought. A rebound in bank shares recently may have helped the decision.

"This could be the best timing for them to sell," said Jerry Yang, analyst at Daiwa Capital Markets in Taipei, noting that Taiwan's economy looks to be bottoming out and the outlook for banks improving. Those factors may attract buyers.

He said he saw the price for the Ta Chong stake at about 1.3 to 1.5 times price-to-book, with local banks such as Fubon Financial (2881.TW) and Chinatrust Financial (2891.TW) as possible buyers.

Carlyle declined to comment. A Ta Chong Bank spokesman said he was not aware of the process. The sources wished to remain anonymous because the process is not yet public.

Ta Chong shares jumped 6.7 percent on the Reuters report, to close limit-up on Friday after the news, far outpacing a 0.3 percent rise in Taiwan's benchmark share index .TWII. The shares have gained about 66 percent from December lows while the financial sector sub-index .TFNI is up by a fifth.

Most private equity investments in Taiwan's financial sector were aimed at rebuilding the island's financial sector, which was hit hard by a consumer lending crisis beginning in 2005.

Buyout firms such as TPG TPG.UL, Longreach and Carlyle hoped low valuations, China's growth prospects and a local consolidation wave would boost the investments.

Carlyle bought a 35 percent stake in Ta Chong for NT$21.5 billion ($728.7 million) in 2007, marking its first foray into Taiwan's banking sector. The same year, Longreach bought a majority stake in En Tie Commercial Bank Ltd (2849.TW) for NT$18.8 billion ($637 million).

BENEFITS HARD TO COME BY

But the hoped-for benefits didn't really materialize. Taiwan's banks' return on assets in 2011 was 0.53 percent -- the lowest among banks in Asia excluding Japan, according to Fitch Ratings in Taiwan.

They also operate with little in the way of overseas operations to fuel growth.

Moreover, private equity firms, in trying to invest in or cash out, have faced stiff resistance in Taiwan from politicians and regulators, who see them as putting short-term profits over a local emphasis on industry stability.

"Clearly banks and insurance companies have had a tough time in Taiwan. And the regulatory flip-flop hasn't helped matters either," said one of the sources.

Carlyle becomes the third private equity firm since December to either try to exit a Taiwan financial investment or sell down.

Reuters reported last week that Longreach was exploring the sale of its $440 million majority stake in En Tie.

TPG in December cut its stake in Taishin Financial (2887.TW) to 6.55 percent from 14.82 percent, including selling a 3.45 percent part to Cathay Financial (2882.TW), Taiwan's largest financial holding firm, for $155 million.

"These PE funds have held on to their investments for so many years. And share prices of their Taiwan investments have rebounded quite sharply since the bottom of last year," said Alex Hu, head of proprietary trading department at Taiwan's Mega Financial (2886.TW).

"The combination of these two makes it more likely for PE funds to sell their investments, even at a loss."

The exits also come at a time when many private equity funds are nearing the end of their investment cycles. When that occurs, buyout shops are incentivized to cash out of deals to return money to investors before raising fresh money.

According to public disclosures, Carlyle owns a 23.76 percent stake in Ta Chong. But a source familiar with the matter said that through options and other vehicles, Carlyle's stake totals around 40 percent.

(Additional reporting by Faith Hung and Jonathan Standing in TAIPEI, and Stephen Aldred in HONG KONG; Editing by Michael Flaherty, Alex Richardson and Muralikumar Anantharaman)

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