KKR & Co. and Bain Capital LLC sold shares of NXP Semiconductors NV in a $476 million initial public offering for 46 percent less than they paid to take control of the company at the height of the credit-market bubble.
NXP, acquired by KKR, Bain and three other private equity firms in a $9.4 billion leveraged buyout, sold 34 million shares at $14 each yesterday, the company said in a statement. Owners sought $18 to $21 per share in the IPO after paying an average of $26.07 a share for the Eindhoven, Netherlands-based unit of Royal Philips Electronics NV in 2006. The stock was unchanged at $14 in Nasdaq Stock Market trading today.
Buyout firms are selling some of their investments at a discount 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 leveraged 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.
“This is an investment that went bad,” said Michael Yoshikami, who oversees about $1 billion as chief investment strategist at YCMNet Advisors in Walnut Creek, California. “They bought at the peak. The private equity investors are trying to cut their losses.”
Credit Suisse Group AG of Zurich and Goldman Sachs Group Inc. and Morgan Stanley in New York led the sale, while NXP turned to Simpson Thacher & Bartlett LLP in London for legal advice.
NXP, which offered 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 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 held 19.9 percent of NXP, which reported a deficit of $161 million for 2009, its third year of losses since the LBO.
NXP had $5.28 billion of total debt at the end of 2009, according to the prospectus. The company’s 9.5 percent notes due in October 2015 rose 0.5 cent to 99.5 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
KKR, the New York firm founded in 1976, and Boston-based Bain, 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 sold a portion of NXP at a discount to the value of their initial investment, the IPO price of $14 per share was still more than the chipmaker’s “fair value.”
KKR said in its quarterly financial statement released in May that its stake in NXP was worth 60 percent less than its original purchase price.
“The key for us is to be able to set a solid foundation moving forward,” Rick Clemmer, NXP’s chief executive officer, said in a conference call today. “Frankly, in some events, maybe a lower price gives us a stronger opportunity to be able to increase the value for our new shareholders.”
At the original midpoint offer price of $19.50 each, NXP’s debt burden after the IPO would have exceeded 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 was greater than all the publicly traded companies that NXP lists in its SEC filings as direct competitors, none of which had 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 had ratios of less than 2.1 times.
While the IPO trimmed the private equity investors’ paper losses on NXP to 46 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 narrowed to 9.6 percent. The Standard & Poor’s 500 Index slid 8.4 percent after payouts.
KKR and Bain also took NXP public in the worst market for U.S. private equity IPOs in at least a decade.
The 18 initial offerings backed by LBO firms have lost 3.4 percent of their value in the first month of trading this year through yesterday, while all other IPOs have posted an average gain of 5.8 percent, data compiled by Bloomberg show.