Abu Dhabi firm attempts $3.9 billion buyout of Chartered Semiconductor

Abu Dhabi-based Advanced Technology Investment Company (Atic) said on Sunday it intends to acquire 100% of Singapore-based foundry Chartered Semiconductor Manufacturing for a firm value of S$5.6 billion ($3.9 billion).

Atic will offer S$2.68 per share for all of Chartered's outstanding shares, for a total equity value of S$2.5 billion. The price represents a premium of 14.2% to the 30-day volume-weighted average price (VWAP) of Chartered's shares on the Singapore Exchange, and a premium of 26.8% to the 90-day VWAP and a 44.2% premium to the six-month VWAP. The price translates into $18.64 for each of the company's US-listed American depositary shares (ADS), although the exact amount per ADS is subject to adjustment for prevailing exchange rates, taxes and fees.

Singapore-based investment firm Temasek Holdings has been invested in Chartered since 1987 and currently holds 62% of the equity. It supports the sale to Atic and has provided an irrevocable undertaking to vote in favour of the transaction.

Atic is proposing to delist Chartered via a scheme of arrangement. This means that 75% of Chartered's minority shareholders must vote in favour of the delisting at a shareholder meeting which is yet to be scheduled. This is an "all or nothing" strategy as Atic will not buy any shares if it does not reach the threshold necessary to delist. A delisting is critical for Atic to pursue its plans to integrate the operations of its own investee company, Globalfoundries, with Chartered, said sources.

Doug Grose, chief executive officer of Globalfoundries, will become chief executive officer of the combined operation, while Chia Song Hwee, who is currently CEO of Chartered, will become chief operating officer. Chia will also spearhead the integration effort.

On a call to brief analysts on the transaction yesterday morning, an analyst questioned Chartered management on the timing of the deal and said that while the offer price represents a premium to the depressed prices at which Chartered has traded over the past few months, it is not necessarily attractive compared to prices the stock has earlier seen. Chartered management said a key driver of the deal was the ability of Atic to make the ongoing investments required for the foundry business.

In the second quarter of 2009, Chartered made a net loss of $39.4 million on revenues of $349 million. The company released revised guidance for the third quarter on Sunday, saying it expects third quarter revenues between $405 and $415 million, while the bottom line is expected to end up between a $4 million net loss and a $4 million net profit.

Chartered is advised by Citi and Morgan Stanley. In addition, Deutsche Bank was yesterday appointed independent financial adviser to the shareholders of Chartered. Morgan Stanley has been working with Chartered over recent years to help its management unlock value from the company, said sources.

Atic is advised by Credit Suisse. George Boutros, the San Francisco-based co-chairman of the bank's global technology group, was also personally involved, said sources. Shearman & Sterling is providing Atic with legal advice.

In addition to the equity, Atic is also taking on debt, including bonds and convertible redeemable preference shares (CRPS), of approximately S$3.1 billion as of June 30, resulting in a total firm value of S$5.6 billion. Both the bonds and the CRPS have a change of control put and Atic has agreed to buy out the bondholders and CRPS-holders who choose to put the instruments back to the issuer.

Atic is a technology investment company wholly owned by the government of Abu Dhabi. The Chartered acquisition is Atic's second investment in the semiconductor industry. In March 2009, it created Globalfoundries, a US-headquartered, semiconductor company, in partnership with Sunnyvale-based chip maker Advanced Micro Devices (AMD). Indeed, a key motivation for Atic's takeover of Chartered is to extract synergies from a combination of Globalfoundries and Chartered.

Abu Dhabi's coffers are still full which has enabled the emirate to strike deals throughout the economic downturn. Last year, Qatari and Abu Dhabi investors bailed out Barclays Bank. More recently, Abu Dhabi extended a helping hand to neighbouring emirate, Dubai, which has been hit hard as liquidity has been drying up.

Abu Dhabi's relationship with the foundry industry dates back to 2007 when the country's sovereign wealth fund, Mubadala Development Company, acquired an 8.1% stake in AMD. A year later, in October 2008, AMD announced it would spin off its manufacturing operations into a joint venture with Abu Dhabi investors. However, the financial crisis brought Abu Dhabi back to the table to demand a better deal. 

In December a new deal was announced whereby the manufacturing assets were valued at 0.85 times book value and spun out into a separate company, Globalfoundries. Abu Dhabi created Atic to house its 65.8% share of Globalfoundries. Atic paid $700 million to AMD and invested $1.4 billion in Globalfoundries for its stake. AMD owns the balance 34.2%. The US company did not, however, concede voting rights and despite the differentiated shareholding, the two partners have equal voting rights.

Globalfoundries comprises AMD's factories in Dresden, Germany, and a state-of-the-art facility under construction in Saratoga, New York, which are complementary to the six fabs Chartered has in Singapore.

Atic is keen to build further on Chartered's customer base as well as its capabilities in both 8-inch and 12-inch fabs, said the companies in a joint press release.

Moody's yesterday placed Chartered's Ba2 rating on review for a possible downgrade and said around $950 million of debt issued by Chartered could be affected.

"The rating action also reflects Abu Dhabi's sovereign rating of Aa2 relative to Temasek's Aaa rating, which could lead to a reduction of the current three-notch rating uplift," said Ken Chan, a Moody's senior analyst.

It was a busy weekend for telecommunications, media and technology bankers as, on Sunday, China Unicom and Madrid-based Telefonica also announced a strategic alliance. The two firms will cooperate in business areas such as the joint acquisition of infrastructure and equipment for customers; the joint development of wireless service platforms; the joint provision of services to multinational enterprises; roaming; and research and development, among others.

As part of the alliance, China Unicom and Telefonica have agreed a $1 billion share swap. Pricing of the shares is based on the arithmetic average of the closing prices of each party's shares on the Hong Kong stock exchange and the Madrid stock exchange, respectively, for the 30 trading days up to August 28. After the share swap China Unicom will own 0.88% of Telefonica, while Telefonica's shareholding in China Unicom will increase to approximately 8% from 5.38% currently. 

Telefonica operates in 25 countries and has more than 264 million customers globally. It is focused on Spain, the rest of Europe and Latin America. China Unicom has 141 million mobile subscribers, 108 million local access subscribers, and 36 million broadband subscribers across China. It was one of the beneficiaries of the large-scale restructuring of the Chinese telecommunications sector last year.

China Unicom was advised by China International Capital Corporation (CICC). Telefonica did not work with a financial adviser, but took legal advice from Clifford Chance.