Freescale’s Owners Seek IPO at 36% Discount to Buyout Price

Freescale Semiconductor Holdings Ltd. is selling shares at a 36 percent discount to what private- equity owners paid as it attempts the biggest initial public offering of a U.S. technology company since Google Inc. (GOOG)

The chipmaker is offering 43.5 million shares for $22 to $24 each, compared with an average price of $36 that investors including Blackstone Group LP (BX), Carlyle Group, Permira Advisers LLP and TPG Capital paid for Freescale, according to a filing with the U.S. Securities and Exchange Commission. The midpoint of the range would value the unprofitable company at about $5.5 billion.

The private-equity firms, which aren’t selling their stakes, plan to raise as much as $1.04 billion to pay down Freescale’s $7.5 billion in debt accumulated in a 2006 leveraged buyout. While Internet companies LinkedIn Corp. and Yandex NV surged after their IPOs, investors may have less of an appetite for Austin, Texas-based Freescale, the most indebted semiconductor company globally.

“I don’t think you’re going to find investors who are going to be willing to put their money up until they see the economic benefit for this,” said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $14.8 billion. “It’s a capital-intensive industry, and a debt-heavy balance sheet is not your friend. You’re up against companies that are spending a lot of money to continue to stay competitive.”

At the $23 midpoint, Freescale would be valued at 1.2 times last year’s sales, less than the average of 1.9 times for the analog chip industry, according to data compiled by Bloomberg. Texas Instruments Inc. (TXN), the biggest analog chipmaker, trades at about 2.8 times sales.

$1 Billion Loss

Freescale, which will be listed on the New York Stock Exchange under the ticker symbol FSL, has been one of the worst performers among companies taken private during the buyout boom, with a $1 billion net loss in 2010. Other private equity-backed IPOs this year have benefited their investors.

The initial share sale of Kinder Morgan Inc. raised $2.9 billion in February, valuing Carlyle Group’s stake at more than twice what it paid. Carlyle was among the investors that sold a combined 13.5 percent of Kinder Morgan in the offering. The offering was later expanded to $3.29 billion as underwriters exercised an over-allotment option to buy more shares.

Blackstone, Carlyle, KKR & Co. and Thomas H. Lee Partners LP similarly used the January IPO of Nielsen Holdings NV, to trim their stakes and reap profits. That offering raised $1.9 billion for the television ratings company and its owners, including an over-allotment sale.

Photographer: David Paul Morris/Bloomberg

Rich Beyer, chief executive officer of Freescale Semiconductor Holdings Ltd., the former CEO of rival Intersil Corp., was brought in to close factories and design facilities, cut jobs, and get out of less profitable businesses. Close

Rich Beyer, chief executive officer of Freescale Semiconductor Holdings Ltd., the... Read More

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Photographer: David Paul Morris/Bloomberg

Rich Beyer, chief executive officer of Freescale Semiconductor Holdings Ltd., the former CEO of rival Intersil Corp., was brought in to close factories and design facilities, cut jobs, and get out of less profitable businesses.

If Freescale sells at the midpoint of its expected range, the shares owned by the buyout firms would be valued 36 percent below the average purchase price they and other investors paid.

Buyout Boom

Freescale was among the largest LBOs in 2006 and 2007, when 9 of the 10 biggest buyouts of all time were announced, including Kinder Morgan.

“This a deal that I’m sure they regret having done,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “Still, at some point, people thought it was going to be a complete zero. Going from a zero to whatever it is today is a win, so give them some credit.”

The global financial crisis hit Freescale less than two years after its owners closed their $16.2 billion deal. The firms brought in Chief Executive Officer Rich Beyer, the former CEO of rival Intersil Corp. (ISIL), to close factories and design facilities, cut jobs, and get out of less profitable businesses. As markets recovered, Freescale also reduced borrowings by more than $2 billion after negotiating with bondholders.

‘Sustainable Structure’

The IPO is the latest step toward “achieving a sustainable capital structure, but they’re not there yet,” said Jason Pompeii, an analyst with Fitch Ratings in Chicago. “They need to outgrow the market, they need to capture market share and they need the markets to remain robust. It’s not an easy task.”

Rob Hatley, a Freescale spokesman, declined to comment. Deutsche Bank AG, Citigroup Inc., Barclays Plc, Credit Suisse Group AG and JPMorgan Chase & Co. (JPM) are managing the offering.

Freescale is trying to repeat the success of other buyout- backed chipmakers that sold shares ahead of an industry rally. Avago Technologies Ltd. (AVGO), whose owners include KKR and Silver Lake, has more than doubled since its IPO in August 2009. NXP Semiconductor NV (NXPI), backed by KKR and Bain Capital LLC, has almost doubled since going public last August, when it raised less than it originally planned.

The Philadelphia Semiconductor Index, which investors use to track chip industry performance, gained 23 percent in the last 12 months. Makers of analog chips, which provide basic functions in everything from washing machines to military hardware, rose 54 percent in that period as a group, according to Bloomberg data. The gains have leveled off in recent months.

Window ‘Closed’

Freescale “can’t expect to be bailed out by a bull market in semiconductor stocks,” said Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California, in a research note this week. “That window seems to have closed.”

Demand for new semiconductor stocks has been limited this year. Magnachip Semiconductor Corp., a Luxembourg-based maker of chips used in phones, notebook computers and digital cameras, has gained 2 percent since it went public in March. BCD Semiconductor Manufacturing Ltd., based in Shanghai, is down 9 percent from its January debut.

A successful offering by Freescale may boost the rest of the sector, according to Peter Astiz, co-head of the technology practice at law firm DLA Piper in East Palo Alto, California. While investors are more focused on snapping up Internet IPOs, money can still be made in semiconductors, he said.

“As advanced as the technology is in semiconductors, it’s almost like it’s old technology in the way people think about it,” said Astiz, who represented Magnachip in its IPO. “People tend to flock to the latest, greatest thing.”

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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