NXP Semi's IPO: $4.5 Billion in Debt Makes the Underlying Business Irrelevant
This analysis of NXP Semiconductors ( NXPI ) was provided to TradingIPOs subscribers in advance of its Friday, August 6 IPO. NXP priced 34 million shares for $14 each, raising $476 million. It had expected shares to sell for $18 to $21.
NXP Semiconductors plans on offering 34 million shares at a
range of $18-$21. Credit Suisse, Goldman, Morgan Stanley, BofA
Merrill Lynch and Barclays are leading the deal, JP Morgan, KKR,
ABN Amro, HSBC and Rabo co-managing. Post-IPO, NXPI will have 249.3
million shares outstanding for a market cap of $4.861 billion on a
pricing of $19.50. IPO proceeds will be used to repay a portion of
NXPI's substantial debt.
KKR will own 28% of NXP post-ipo, Bain Capital 24%. Philips Electronics will own 17%. KKR, Bain and others acquired NXP from Philips Electronics in a 2006 leveraged buyout.
***Debt is the issue here. Factoring in debt paid off on IPO, NXP will have $4.5 billion in dept post-IPO. I will never be interested in an IPO coming public with $4.5 billion in debt. It is that simple here. $4.5 billion in debt makes the underlying business irrelevant, I've no interest in this deal at any price.
From the prospectus :
We are a global semiconductor company and a long-standing supplier in the industry, with over 50 years of innovation and operating history. We provide leading High-Performance Mixed-Signal and Standard Products solutions that leverage our deep application insight and our technology and manufacturing expertise in radio frequency ("RF", analog, power management, interface, security and digital processing products.
NXP produces a variety of mixed signal (analog and digital) and
'standard' semiconductors. The standard semis tend to be the more
commoditized, lower margin semiconductors. End markets include
automotive, identification, wireless infrastructure, lighting,
industrial, mobile, consumer and computing applications.
58% of revenues from Asia-Pacific region.
Large operation here. 68% of of mixed-signal semis and 80% of 'standard' semis are either the number one or two market position in the world. 14,000 worldwide issued and pending patents.
Top customers include Apple ( AAPL ), Bosch, Continental Automotive, Delphi, Ericsson ( ERIC ), Harman Becker, Huawei, Nokia ( NOK ), Nokia Siemens Networks, Oberthur (OBTHF.PK), Panasonic ( PC ), Philips ( PHG ), RIM ( RIMM ), Samsung (SSNLF.PK), Sony ( SNE ) and Visteon (VC).
The semiconductor sector is highly cyclical. The worldwide recession had a severe impact on operations. This led to a 2008 'redesign' of the company including:
- a focus on higher margin Mixed Signal semiconductors;
- $650 million in annual costs savings;
- reduced manufacturing facilities from 14 to 6.
Mixed-signal semi revenues now account for approximately 65% of
total revenues. Gross margins for these are 52%, compared to
approximately 30% for standard semis.
$4.5 billion in debt post-IPO. Debt servicing will cost NXPI $1.50 per share annually.
2009 - Revenues declined significantly 30%. Revenues of $3.8 billion. Gross margins of 25%. Negative operating margins. Plugging in debt servicing and folding out one-time charges, losses were a whopping $4.84 annually. Note that a portion of these losses was non-cash amortization charges related to the 2006 leveraged buyout. Cash flow wise plus debt servicing led to a 'more reasonable' loss of $4.40 per share.
2010 - Revenues and margins improving substantially, while NXPI has attempted to also get costs under control. Total revenues should be $4.8 billion, an increase of 26% from 2009. Gross margins should improve to 31%, due to the increase in mixed-signal semi revenues. Operating margins of 7%. Unfortunately debt servicing will eat up all operating profits and then some. Losses should be around $0.25 per share. Note again amortization charges will be pretty steep. Cash flows with debt servicing factored in give us a better idea of the profit picture. There, NXPI should see a small positive overall cash flow in 2010.
Conclusion - The debt levels make NXPI very susceptible to trouble during cyclical low points in the sector. NXPI was fortunate to survive the 2008 slowdown. Actually if revenues had remained depressed for even another year, NXPI may have not been viable. The debt here is the issue. NXPI is a large dominant player in the mixed-signal and standard semi space. Unfortunately the debt levels are far too high here. Not interested at any price.
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