Carlyle Group and Taiwan Mobile struck a $1 billion deal on Wednesday, with Carlyle taking a big chunk of the telecommunications group in a sign the private equity firm has faith in the island's economy.

The deal creates Taiwan's largest pay TV operator and marks the second major acquisition in Taiwan's telecoms sector in the last five months after China Mobile agreed to buy 12 percent of Taiwan's Far EasTone for $529 million in April.

Though Taiwan's economy is still recovering, investors are betting that improved relations with China will open up business prospects and profits.

Carlyle will exchange its stake in Taiwan cable company Kbro for a 15.5 percent stake in Taiwan Mobile, while Taiwan Mobile will pay T$32.8 billion ($1 billion) via a share swap and cash. It will also assume T$24 billion of debt.

This is not an exit for us, Carlyle Managing Director Gregory Zeluck told a news conference. We continue to be confident in the Taiwan market, and hope to help Taiwan Mobile become a bigger player in the industry.

The share swap values Carlyle's Taiwan Mobile stake at NT$55 per share, representing about a 5 percent premium to Wednesday's closing price of the Taiwan telecom operator.

JPMorgan is the adviser to Carlyle on the deal.

BIGGEST CABLE OPERATOR

The transaction will create the largest pay TV operator in Taiwan, with a 32 percent market share of 1.6 million subscribers, Taiwan Mobile said at the news conference.

The deal would allow Taiwan Mobile to post a major threat to Chunghwa Telecom in the ADSL Internet business, said Chang Chi-sheng, a fund manager at Uni-President Asset Management.

The deal will make Carlyle the second-largest shareholder of Taiwan Mobile after the Tsai family.

The Tsai family also controls Fubon Financial, which has become the parent of Taiwan's No. 2 life insurer following its $600 million acquisition of ING's domestic insurance operation.

The enterprise value of Kbro -- market value and debt -- is $1.8 billion, according to sources close to the deal who were not authorized to speak publicly about the deal.

Taiwan Mobile aims to close the deal some time late this year, pending regulatory approval, President Harvey Chang said.

Shares of Taiwan Mobile ended up 1.16 percent at T$52.50, roughly in line with the broader market's 1.28 percent rise.

($1=T$32.55)

(Additional reporting by George Chen in Hong Kong; Editing by Anshuman Daga and Jacqueline Wong)

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