KKR's planned $1.6-billion (U.S.) buyout of Taiwan electronics components maker Yageo came under a cloud on Tuesday after a source with direct knowledge of the matter said the island's financial regulator expressed concern over minority shareholders' rights.
Worries over the deal's fate sent Yageo's shares sliding more than 6 per cent, and come less than two weeks before the June 24 deadline for the buyout to proceed, when U.S. private equity firm KKR will have the choice of a second and final extension or walking away from the deal for a year.
The Financial Supervisory Commission (FSC), which recently conducted its latest review of additional documents submitted by Kohlberg Kravis Roberts and Yageo, was also concerned that the deal's debt ratio was too high, said the source.
"The deal has raised several issues, among them these two concerned the FSC most," said the source, who spoke on condition of anonymity due to the sensitivity of the matter.
But leverage bankers who are joining the 31-billion New Taiwan dollars ($1.08-billion U.S.) financing backing the deal told Reuters the regulator's concerns were misplaced.
The bankers feel the debt levels are reasonable, and point to the large number of banks that have already committed to the deal, which has pushed the price down on the financing.
"Thirty banks have put their hands up to join the deal; it's a slam dunk," said one Hong Kong-based leverage finance banker eyeing the deal.
A Taiwanese leverage finance banker noted that the debt to EBITDA multiple on the buyout, an industry standard measure of leverage, was less than four times.
"That is the regional standard for buyouts," he said.
A banker noted KKR's track record on buyouts in Asia as a reason to join the deal.
The private equity firm's portfolio companies weathered the financial crisis well, which bankers say is partly because the firm is cautious about the amount of debt it uses in its acquisitions.
"The problem is the regulator hasn't actually clarified what is acceptable leverage. They are being vague on purpose because leverage is not their real concern," said another banker.
The FSC, KKR, Yageo and UBS AG , the deal's financial adviser, all declined to comment.
The bankers declined to be named because the financing talks were private.
KKR and Yageo founder Pierre Chen extended the public offering once for 30 days after their announcement on April 6.
Without regulatory approval, they can apply for a second extension or withdraw the offering and not launch it within one year, said the source.
Taiwan's regulators have built up a reputation for being picky, especially where private equity firms are involved as they are seen as interested mainly in making a quick profit.
Taiwan in 2006 blocked Carlyle Group's plan to buy ASE and delist the firm, citing ASE's status as the world's No.1 IC testing and assembly firm and its heavy weighting in the local stock market.
Following the announcement of KKR's deal, the FSC took the unusual step of hauling in Chen for a three-hour personal grilling, asking among other things about whether the 16.1 New Taiwan dollars per share offer price was fair for Yageo's minority shareholders.
"Yageo minority shareholders' rights have apparently been sacrificed in this deal. The offering price does not match Yageo's real value," said a fund manager of a local investment firm, which does not own Yageo shares. The manager did not want to be identified because of the sensitivity of the matter.
A final decision on the deal rests with the Investment Commission, the regulator of inbound investment.
Yageo shares ended 6.4 per cent lower on Tuesday, trailing the broader market's 1.33 per cent jump. The shares had dropped sharply after local media reported the FSC has issued a preliminary rejection of the deal.