MStar Takeover Lures Traders to Asia Top Return: Real M&A

Traders willing to bet that a pair of semiconductor companies from Taiwan will get their combination past authorities in China stand to reap the biggest return in Asia.

Almost a year after MediaTek Inc. agreed to buy MStar Semiconductor Inc. for $3.8 billion, the Hsinchu, Taiwan-based companies are still waiting for approval from China’s antitrust regulator and yesterday delayed the deal’s closing for a third time. MStar now trades 15 percent below MediaTek’s stock-and-cash bid, the biggest discount of any pending deal in Asia higher than $500 million, data compiled by Bloomberg show.

While the combined company would control more than half of the global market for chips used in televisions, regulators in South Korea -- home to two of the world’s largest makers of flat panel televisions -- approved the deal with certain conditions. China’s Ministry of Commerce is likely to follow suit as competition keeps prices from rising, said Kim Eng Securities Ltd. China has barred only one proposal in the five years since it adopted new anti-monopoly laws and instead may insist on discounts on some products to appease Chinese TV manufacturers, said Sanford C. Bernstein & Co.

“The deal will be approved,” said Mark Li, a semiconductor industry analyst at Bernstein in Hong Kong. “It is actually better for China to get concessions from MediaTek and MStar, instead of an outright disapproval.”

Opaque Process

MediaTek announced the acquisition on June 22 of last year, saying it planned first to buy 48 percent of MStar -- a stage that has been completed -- followed by a full takeover.

While it initially said the deal would close by January, that deadline has been extended three times as the companies await approval from China’s antitrust regulator. Saying the application is still in progress in China, the companies yesterday extended the closing date to Nov. 1 from Aug. 1.

MStar rose 1.3 percent at NT$239.5 today, reversing an earlier decline of as much as 3.8 percent after the delay was announced. MediaTek advanced 0.4 percent to NT$355.5.

Under anti-monopoly laws enacted in 2008, China requires any global transaction that will influence domestic markets to be approved by the commerce ministry. Delays are common when a deal affects state-owned enterprises or an industry that’s important to the country’s economy, said Andrew Foster, a Beijing-based lawyer at Skadden, Arps, Slate, Meagher & Flom LLP.

Shaken Confidence

“They are not looking to prohibit international transactions but are very interested in the impact of those transactions on China, on Chinese consumers and on Chinese industrial policy,” he said in a phone interview. “It’s a very opaque and confidential process.”

Yesterday, before the timeline was further extended, MStar shares closed at NT$236.5, compared with the NT$282.08-per-share value of MediaTek’s cash-and-stock bid. That offered shareholders a 19 percent return if the deal closes, more than any other pending offer in Asia valued at more than $500 million, according to data compiled by Bloomberg.

If the deal closes by the new Nov. 1 deadline, traders who bought MStar shares at yesterday’s closing price still would reap an annualized return of about 52 percent, based on the value of the bid yesterday, data compiled by Bloomberg show.

Blocking Coke

MediaTek Chief Financial Officer David Ku declined to comment on whether the company has been asked to offer the Chinese regulator concessions in order to get approval. MStar is still in discussions with Mofcom, and declined to say what phase of the approval process the application is currently in.

Shen Danyang, a spokesman for the commerce ministry, said he had no information to release about the deal.

Since China’s anti-monopoly law was introduced, Mofcom has blocked only one takeover: Coca-Cola Co.’s $2.3 billion bid for China Huiyuan Juice Group Ltd. in 2009. As of the end of September 2012, the ministry had handled 474 cases, according to its website.

MediaTek, which may wind up with as much as 80 percent of the Chinese market for chips used in TVs once the deal closes, is facing resistance from Chinese TV manufacturers, Li at Bernstein wrote in an e-mail before the Nov. 1 extension was announced. To gain China’s approval, it may need to offer discounts on certain chips or sell competing products so Chinese TV makers are given a choice, he said.

‘Corrective Measures’

“If the Korean regulator has no issue, then I don’t see why the Chinese will,” Warren Lau, a Hong Kong-based analyst at Kim Eng, said in a phone interview. “Just like the Korean regulators, they will be closely monitoring the pricing front. But prices mostly will continue to be on the downward trend -- you can hardly find any tech product where the price goes up.”

The Korea Fair Trade Commission approved the deal on March 18, imposing “corrective measures,” including demands on price reductions to certain products. The combined company would have a 57 percent share of the global market, the regulator said

Mofcom has given 18 conditional clearances to deals since 2008, and in recent years has appeared more willing to impose remedies such as pricing restrictions, or insist that the companies keep their branding, marketing or other operations separate, said Mark Jephcott, the Hong Kong-based head of Asia competition law at Herbert Smith Freehills LLP.

Glencore, Xstrata

In the case of commodities trader Glencore Plc’s acquisition of rival Xstrata Plc, China vetted the deal for 13 months before requiring Glencore to divest a copper mine in Peru, among other conditions.

“With relatively high market share expected in China, regulators do get nervous,” Jephcott said. “It’s fairly likely there are remedy discussions going on.”

Still, not everyone is confident the deal will be approved. MediaTek may have to settle for the 48 percent of MStar that it already owns, said Chelsey Su, an analyst at Masterlink Securities Corp. in Taipei.

“It’s very difficult to accomplish this deal,” she said in a phone interview before the extension was announced yesterday. “If it can’t be accomplished before August, then I don’t think three years later it can be accomplished.”

Working to the deal’s advantage is the fact that semiconductor prices continue to fall, while MediaTek and MStar face competition from companies including Taiwan’s Novatek Microelectronics Corp., Kim Eng’s Lau said. At the same time, customers are getting more powerful, he said.

Decision Timeline

“Suppliers of TV chip sets are consolidating, but their customers -- the TV vendors -- are also consolidating, so the playing fields are actually quite even,” Lau said.

The regulator’s own guidelines mean it may not have to reach a decision for months. The review of a deal can take up to 180 days after the ministry deems the application ready for submission, a separate process that could take several weeks. If a transaction isn’t approved in the first 30 days, the regulator can extend the process for another 90, and then a further 60 days before a decision must be made to approve, approve with conditions, or prohibit the deal.

The clock on MediaTek’s latest application may have begun in early March, according to both Jephcott at Herbert Smith Freehills and Foster at Skadden Arps, neither of whom are involved with the filing. That would give Mofcom until September to make a decision, under its own guidelines.

The deal is likely to close by the fourth quarter, said Kim Eng’s Lau.

“The acquisition is quite likely to be approved by the Chinese regulators, subject to several conditions,” he said. “This is a TV market. It’s not something that has anything to do with national security.”

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