KKR & Co. and Bain Capital LLC, which earned billions of dollars buying and selling companies, are facing a 25 percent discount in the initial public offering of NXP Semiconductors NV after three years of losses.
NXP, acquired by KKR, Bain and three other private equity firms in a $9.4 billion leveraged buyout, plans to raise $714 million today, selling shares at about $19.50 each, according to a U.S. Securities and Exchange Commission filing. Owners paid an average of $26.07 a share for the Eindhoven, Netherlands-based unit of Royal Philips Electronics NV in 2006.
The discount shows how the wealthiest investors are still smarting three years after debt-fueled acquisitions peaked just as credit markets started to freeze. NXP, which makes semiconductors used in everything from radars to hearing aids and pachinko machines, reported combined losses of $5.5 billion since the takeover. KKR, the New York buyout firm founded by billionaire investors Henry Kravis and George Roberts, said in May its stake in NXP was worth 40 cents on the dollar.
“The premise was that these financially sophisticated people could run a business better than the people who founded it, and it turned out to be wrong” with NXP, said Daniel Genter, president of RNC Genter Capital Management in Los Angeles, which oversees about $3.2 billion. “Anybody can hold the helm when the sea is calm. The challenge is to create value when you’re in a recessionary environment, where they failed.”
NXP, which is offering a 14 percent stake, was the semiconductor unit of Philips. The world’s biggest lighting company sold an 80.1 percent stake to KKR, Bain, Silver Lake in Menlo Park, California, Apax Partners LLP of London and Amsterdam-based AlpInvest Partners NV in September 2006.
The firms paid 3.45 billion euros ($4.37 billion), which valued the company at about $5.46 billion at the time of the takeover, according to NXP’s website and Bloomberg data. The IPO would give the chipmaker a market capitalization of $4.86 billion, based on the midpoint IPO price.
The acquisition, which included assumed debt of 4 billion euros, was the biggest LBO in the semiconductor industry’s history at the time and completed less than a year before credit markets seized up in August 2007. Amsterdam-based Philips still owns 19.9 percent of NXP, which reported a deficit of $161 million for 2009, its third year of losses since the LBO.
KKR, founded in 1976, and Boston-based Bain, the private- equity firm started by former U.S. presidential candidate and Massachusetts Governor Mitt Romney in 1984, together oversee $122 billion and have led some of the largest buyouts.
Private equity firms take controlling stakes in companies and use borrowed money to finance most of the acquisition. They aim to make money for their investors usually by replacing management, selling off unprofitable assets, extracting dividends and then cashing out at a higher price.
The firms earn money for themselves through annual fees, usually about 2 percent of assets under management, and by taking a share of profits, about 20 percent.
Private equity funds spent $2 trillion from 2003 to 2007 on leveraged buyouts, before the credit crisis and the collapse of New York-based Lehman Brothers Holdings Inc. in 2008 brought deal-making to a halt. LBO firms completed $12.8 billion in U.S. buyouts last year, the smallest amount since at least 1995, according to data compiled by Standard & Poor’s.
They are now turning to initial offerings to pare debt and reduce their stakes, a year after buyout firms returned less money to their clients than any time in the past decade, data compiled by London-based Preqin Ltd. show. Private equity-backed companies accounted for at least 50 percent of the IPOs filed with the SEC last quarter, data compiled by Bloomberg showed.
While KKR and Bain are trying to sell a portion of NXP at a discount to the value of their initial investment, the $18 to $21 per-share offer price for 34 million shares is still a premium to the chipmaker’s “fair value.”
KKR’s stake in NXP is now worth 60 percent less than its original purchase price, according to the private equity firm’s quarterly financial statement released in May.
The buyout firms are also asking IPO buyers to invest in a company that has more debt relative to its cash flow than any of its rivals. NXP’s debt burden after the IPO will exceed its estimated 2010 earnings before interest, taxes, depreciation and amortization by more than seven times, data compiled by Bloomberg and London-based Independent International Investment Research Plc show.
That’s greater than all the publicly traded companies that NXP lists in its SEC filings as direct competitors, none of which have a debt-to-Ebitda ratio of more than 3.2 times.
Texas Instruments Inc. of Dallas, the biggest maker of analog chips that go into everything from barcode scanners to aircraft flight-control systems, has no debt, data compiled by Bloomberg show. National Semiconductor Corp. of Santa Clara, California, STMicroelectronics NV in Geneva and Phoenix-based ON Semiconductor Corp. all have ratios of less than 2.1 times.
While the IPO would trim the private equity investors’ paper losses on NXP to 25 percent since the acquisition, shares of its publicly traded competitors have fallen less than 14 percent on average in the same period. Including dividends, the average competitor’s decline narrows to 9.9 percent. The Standard & Poor’s 500 Index slid 8.3 percent after payouts.
“This is not a good deal for the private-equity investors, that’s for sure,” said Steven Kaplan, professor of finance at the University of Chicago’s Booth School of Business. “The LBO market clearly overheated 2005 to 2007, and a lot of the deals were done at the cyclical peak, and that created a huge amount of headwind to making money when you buy high.”
Peter McKillop, a KKR spokesman, declined to comment, as did Bain spokesman Alex Stanton and Todd Fogarty, a spokesman for Apax. Lieke de Jong-Tops, director of corporate communications at NXP, also declined to comment. Jenny Farrelly, a spokeswoman for Silver Lake, and AlpInvest’s Iain Leigh didn’t respond to phone calls and e-mails seeking comment.
NXP is one of seven companies scheduled to price U.S. IPOs this week after the S&P 500 posted its biggest monthly gain in a year in July. IntraLinks Holdings Inc., the New York-based provider of document exchange services for the loan market that was acquired by TA Associates Inc. in a 2007 LBO, will seek to raise as much as $176 million today to repay debt.
KKR and Bain are also taking NXP public in the worst market for U.S. private equity IPOs in at least a decade.
The 17 initial offerings backed by LBO firms have lost 3.5 percent of their value in the first month of trading this year, while all other IPOs have posted an average gain of 6.1 percent, data compiled by Bloomberg show.
“The buying, debt and IPOing is a vicious cycle,” said Jason Cooper, who oversees $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. NXP “continues to show proof that what these guys are doing just doesn’t add up,” he said.