Taiwan: Let's Make A Deal -- Please

Taipei's privatization push is stalled, but a Chunghwa Telecom sale might get it moving

This looked like the moment when Taiwan might finally get its privatization drive back on track. For more than a year, the government had been telegraphing its intention to raise more than $4 billion by reducing its stakes in four companies: Chunghwa Telecom (CHT ), Taiwan Tobacco & Liquor, China Steel, and Chang Hwa Commercial Bank. After months of union opposition and political squabbling, though, the government now will be lucky to complete just one sale -- Chunghwa Telecom Co.

Even that deal, which has already been put off three times since 2003, is far from certain. Last year a plan to sell a 17% stake in Taiwan's biggest phone company for nearly $3.4 billion -- reducing the state's share to 49% -- was aborted after unions threatened strikes protesting layoffs and the loss of generous pension rights among Chunghwa's 28,000 staffers. Then last spring the government proposed selling shares to overseas investors via depositary receipts on the New York Stock Exchange. That set off violent clashes between workers and police outside Chunghwa's headquarters in Taipei on May 17. It was enough to put the deal on hold.

Now union officials, the government, and Chunghwa's management are edging closer to an agreement. Investment banks Goldman Sachs, UBS, and Morgan Stanley have been brought in to smooth the sale, and Chunghwa Chairman Ho Chen-tan and his team have been busy sketching out an agreement with union officials. A strike planned for July 1 was ditched at the 11th hour, after the union announced that a consensus had been reached on benefits. Plans to slash the employee headcount and cut salaries are on hold. So is a proposal that would have eliminated retirement at age 50 for anyone who had been with the company for 25 years. "If the government and company grant us our full demands, then we don't have grounds to oppose privatization," says Chang Hsu-chung, president of the Chunghwa Telecom Workers union.


But Chang and his union are hedging their bets. With a $10.7 billion hole in the national budget that could be plugged with proceeds from asset sales, union officials know the government is eager to do the deal. So they say they're ready to walk away from the table if management doesn't give them what they want. And in hopes of spooking overseas investors, the union is making the case that the sale might be illegal under Taiwan's constitution. "The whole deal has become a political hot potato," says Dominic Grant, an analyst with Macquarie Securities Ltd. in Taipei.

Worse, the agreement now being hashed out will likely make the offering less attractive to investors. The company had originally estimated that as many as 5,000 employees might take early retirement, saving $161 million annually. But new pension and employment guarantees mean fewer are likely to jump ship, and savings could plummet to just $19 million a year, figures brokerage PrimAsia Securities Co. in Taipei. Last year, Chunghwa earned $1.6 billion on revenues of $5.9 billion. If the sale goes through as currently envisioned, PrimAsia estimates that profits will fall by 10% and sales by 2% this year as more callers switch to low-cost cellular service.

Some, though, say an agreement acceptable to the unions might not be so bad. For starters, the union appears ready to agree to a clause that would allow for layoffs if business starts to really taper off. And any deal may be better than continued state control and government interference, says Anand Ramachandran, an analyst with Citigroup Smith Barney in Hong Kong. Privatization "will give management more flexibility in running the company and improving efficiency," he says. Perhaps most important, selling Chunghwa could ultimately get Taiwan's privatization push moving for good.

By Matt Kovac in Taipei

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