Freescale IPO Seeks 47% Discount to Buyout Price After Cut

Freescale Semiconductor Holdings Ltd. is selling shares at a 47 percent discount to what private equity owners paid after cutting the price range in its initial public offering by 17 percent.

The chipmaker is offering 43.5 million shares for $18 to $20 each after lowering the range from $22 to $24, data compiled by Bloomberg show. The current $19 midpoint, which values the unprofitable company at about $4.6 billion, compares 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 regulatory filing.

The private equity firms, which aren’t selling their stakes, plan to raise as much as $870 million 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 this month, Freescale joined Spirit Airlines Inc. in reducing the size of its IPO today.

Freescale “could be one of those deals that in the cold light of day should just get pulled,” said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $14.8 billion. “There’s nothing worse than to bring a deal and have it choke in the system, so they might be a little better off moving this thing to the sidelines and waiting for a while.”

Yandex, LinkedIn

At the original $23 midpoint, Austin, Texas-based Freescale would have been valued at 1.2 times last year’s sales, less than the average 1.9 times for the analog-chip industry, according to data compiled by Bloomberg. Texas Instruments Inc. (TXN), the biggest analog-chip maker, yesterday traded at a multiple of 2.8.

Rob Hatley, a spokesman at Freescale, declined to comment.

A resurgence in dot-com IPOs hasn’t given a boost to Freescale, Spirit and Glencore International Plc. Yandex, the owner of Russia’s most popular search engine, and LinkedIn, the networking website aimed at professionals, raised their offering price ranges ahead of their IPOs. Yandex surged 55 percent on its first day of trading and LinkedIn more than doubled in its debut.

Glencore, the commodities trader, has lost money for buyers after completing a $10 billion IPO in London and Hong Kong earlier this month. The shares traded at 522.2 pence as of 4:35 p.m. local time in London today, 1.5 percent below the IPO price of 530 pence.

Zynga Inc., the biggest maker of games for Facebook Inc., may file for an IPO by the end of June to capitalize on increased interest in startups, a person familiar with the plans said yesterday.

$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 overallotment 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 overallotment sale.

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.”

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, Bain Capital LLC and Silver Lake, 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 12 months through yesterday. 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.

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.”

Spirit

Spirit Airlines, the budget carrier owned by Indigo Partners LLC and Oaktree Capital Management LLC, earlier today cut the number of shares and price range in its IPO, reducing the maximum sought by 37 percent to $202.8 million.

The company is selling 15.6 million shares for $12 to $13 each, according to a filing with the SEC. Miramar, Florida-based Spirit had offered 20 million shares at $14 to $16.

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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