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Taiwan’s China Development Offers Up to $1.9 Billion for KGI

China Development Financial Holding Co. (2883), Taiwan’s largest venture capital company, bid as much as NT$54.6 billion ($1.9 billion) for KGI Securities Co. (6008) targeting the island’s No. 2 brokerage to boost its presence in China.

China Development offered NT$5.5 in cash and 1.2 of its own shares for each share of KGI, valuing the deal at NT$16.71 per share, the Taipei-based company said in an exchange filing yesterday after the market closed. That’s 47 percent higher than KGI’s closing price of NT$11.40 in Taipei yesterday.

Taiwan’s 10th-largest publicly traded financial company by market value said it will use a merger with its own brokerage, Grand Cathay Securities Corp., to push into China where it plans to set up yuan-denominated private equity funds and expand its securities business. Declines in technology company investments have dragged China Development to two straight quarterly losses and a 33 percent share price drop last year.

“Their aim is for the merger to help them expand in the China market, yet it won’t help their share trading business in a meaningful way,” said Eric Chang, an analyst at Jih Sun Securities Co. in Taipei. “It could help their private equity and underwriting businesses in China.”

Open Market Purchase

KGI climbed 6.6 percent, its daily limit, to close at NT$12.15 in Taipei today. That’s the stock’s biggest jump since Jan. 30. China Development advanced 4.7 percent to NT$8.74.

China Development plans to buy 50.1 percent to 100 percent of the Taipei-based securities broker in the open market and will issue as many as 3.9 billion new shares as part of the transaction, it said today.

KGI had 7.7 percent of Taiwan market trading in February, trailing Yuanta Financial Holding Co. (2885), according to data posted on the Taiwan Stock Exchange website. The company had 3,143 employees at the end of December and has acquired five brokers in the past ten years, according to a company report.

KGI was Taiwan’s fourth-largest underwriter last year, with 101 deals valued at $3.3 billion, while Grand Cathay ranked eighth, handling 108 transactions for $2.6 billion, according to data compiled by Bloomberg.

KGI’s net income last year dropped 36 percent to NT$1.98 billion after brokerage commissions, which account for 61 percent of revenue, declined 14 percent, according to data compiled by Bloomberg.

Market Share Boost

Combining KGI with Grand Cathay will lift China Development’s share of the Taiwan brokerage market from 1.63 percent to 9.5 percent, it said in a statement on its Website. Its banking unit, China Development Industrial Bank, has a 30 percent share of Taiwan’s private equity and venture capital market, it said.

China Development “is working with local governments and major institutional investors in Mainland China to set up yuan private equity funds as well as leasing businesses,” it said in the statement. Eddy Chang, spokesman for China Development, and Sheng Chia-chen of KGI, didn’t return calls seeking comment.

“The purchase of KGI would help China Development reduce its reliance on stock investments to drive profits,” said Tina Chen, an analyst at President Securities Corp. (2855) in Taipei.

China Development, which holds stakes in more than 300 companies, posted losses in the third and fourth quarters of last year, according to data compiled by Bloomberg.

“Our investments were overly exposed Taiwan’s technology industry,” it said in a Feb. 15 presentation explaining the losses.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: James Gunsalus at jgunsalus@bloomberg.net.

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