Deal focus: Longreach eyes long overdue EnTie exit

For The Longreach Group, returning the principal – or slightly more than that – on its investment in EnTie Commercial Bank would represent a victory after a 14-year hold and multiple thwarted exit attempts. It remains to be seen whether Taiwan’s regulators will sign off on the deal or effectively kill it by prevaricating in the face of lobbying from local interested parties.

Last week, IBF Financial Holdings agreed to buy EnTie for NT$33.7 billion ($1.2 billion), to be financed through new share issuance. The boards and shareholders of both companies have voted in favor of the transaction. Rakuten, which has a digital banking joint venture with IBF, waived its veto right because it recognized the value of adding a physical bank to a financial services player that currently lacks one.

“Anyone who has analyzed this deal through prism of what is good for the financial system is in favor,” says Mark Chiba a partner and group chairman at Longreach. “If the shareholder votes are respected, it will close. If the interests of Taiwan’s financial system are respected, it will close. What I’m fighting against is the process getting subverted by local interest groups trying to block or delay regulatory approval.”

The private equity firm went as far as to publicly call on Taiwan’s government and regulators to “appropriately protect shareholders, including our investors, and reject interest groups that seek to subvert shareholder democracy and due processes.”

Local toiletries and cleaning products giant Nice Enterprise, a minority shareholder in IBF, has already expressed opposition because it would be diluted by the rights issue used to finance the deal. There is concern that other groups are weighing in behind the scenes – independently or in cooperation with Nice Enterprise – with a view to picking up EnTie on the cheap should the transaction flounder.

Michael Ding, IBF’s president, recused himself from the board vote on the deal because his brother, Jesse Ding, is chairman of EnTie. He resigned ahead of the shareholder vote after another director, representing an affiliate of Nice Enterprise, claimed that that the board meeting didn’t meet required standards. The regulator has instructed IBF’s board to reconvene and discuss the matter.

Such delaying or derailing tactics have been employed successfully before. Three times in the past eight years, negotiations to sell EnTie to other local banks have neared completion only for pricing to be revised downwards or for shareholders of the prospective buyers to intervene, either directly or via the regulator. “It was always someone else trying to block the deal for their own reasons,” Chiba observes.

Opposition to Longreach has also taken a cross-strait edge, with allegations that the GP has mainland Chinese backers. “It’s mind-boggling, especially when you think about the investors we brought into this deal – 62% of the capital is from the US, 26% from Japan, and 12% from Europe,” Chiba says. "These investors are from nations very supportive of Taiwan. And they should be appropriately protected with shareholder democracy and timely regulatory process.”

When Longreach acquired a majority stake in EnTie in 2007, Taiwan was very much in vogue. Between 2006 and 2008, PE firms deployed $11.1 billion in the territory, more than in the next 12 years combined. The Carlyle Group took a stake in Ta Chong Bank and SAC Capital teamed up with GE Capital to buy Cosmos Bank. The likes of HSBC, DBS, Citi, and Standard Chartered all made strategic acquisitions.

At the time, EnTie was insolvent, so private equity participation was welcomed. The NT$23 billion (then $700 million) deal, included $200 million from Longreach’s debut fund and another $150 million in co-investment from Citi, Orix Corporation, and some of the firm’s larger US-based LPs.

There was also a capital protection structure, whereby an initial equity investment was accompanied by a NT$14 billion convertible bond, backstopped by the seller. This allowed Longreach 12 months to work through EnTie’s balance sheet, figure out what needed to be written off, and use the convertible bond to make up the difference. About NT$7.5 billion was converted, giving the GP a 58% stake.

“You come into a bank at a reasonable valuation and if you can turn it around in a consolidating market – cleaning up the balance sheet and establishing a well-run franchise – you can get a 2-3x return over five years,” says Chiba, noting that he led a similar investment in Japan’s Aozora Bank in 2000 when he was CEO of UBS Japan.

In addition to triaging EnTie’s balance sheet, Longreach recruited new leadership and implemented improved internal controls and risk management mechanisms. The global financial crisis meant that earnings growth took longer to rebound, but the business model was fixed within two years.

As of year-end 2020, the bank had 50 branches across Taiwan and total assets of NT$311.5 billion, with a debt-to-equity ratio above 20. Interest income for the year was NT$5.38 billion, while revenue and net profit were NT$5.85 billion and NT$2.17 billion, respectively.

However, deteriorating cross-strait relations have been unhelpful. A year after the EnTie investment, the Kuomintang swept back into power under Ma Ying-jeou and relations with the mainland began to improve. In the run-up to the signing of the Cross-Strait Service Trade Agreement in 2013, which promised to facilitate cross-strait M&A in areas like financial services, Longreach received inbound inquiries from banks in the mainland, Japan, and other geographies interested in the expansion angle.

But the agreement was never ratified by parliament as public sentiment on closer cross-strait ties soured. A series of student-led protests in 2014 specifically targeted Ma’s trade services policy with the mainland. Chiba claims that the combination of the global financial crisis and the failed agreement led to book values for EnTie and its peers falling from 2x to 1x. Non-Taiwan strategic interest petered out.

The ensuing rounds of thwarted exits are not unique to EnTie. Indeed, the slump in private equity investment in Taiwan – it slipped below $100 million in 2012 and only surpassed $1 billion again as recently as 2018 – is arguably as much a function of the difficulties investors encounter exiting assets as it is getting regulatory approval to enter them.

Each of the three bank deals from 2007 resulted in a longer-than-expected holding period, with SAC and GE selling Cosmos to China Development Bank Financial in 2014, and Carlyle exiting Ta Chong to Yuanta a year later. The latter was frustrated several times before getting a deal over the line.

Longreach hopes the approval process for EnTie will be more transparent than on previous occasions. Regardless of whether this marks the end of its journey in Taiwan banking – and despite building what it believes is a strong asset – the private equity firm will not be returning to the industry.

“I defy anyone to say EnTie is not a well-capitalized, robust bank, and the integrity of our team is as good as anything I’ve seen in banking,” Chiba adds. “But when you invest in a regulated asset, you are also assuming that if you do the right thing, the exit can proceed. We have told our investors we won’t touch regulated assets again.”

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• Topics
• Greater China
• Financials
• Trade sale
• The Longreach Group Limited
• Taiwan (China)
• Financial Services