Philips will sell $1.75 billion worth of TSMC shares to financial investors based in Taiwan. Another $2.5 billion worth of stock will be placed through a public offering of American Depositary Shares within calendar 2007. A third tranche of around $1.5 billion will be tendered by Philips in a share repurchase via tender offer which TSMC intends to launch in 2007.
TSMC will launch further share repurchase programmes between 2008 and 2010 and Philips will tender its remaining TSMC shares - valued at around $2.75 billion - in such programmes or place them with financial investors acceptable to TSMC. TSMC reiterated its commitment to maintaining its dividend programme despite the buyback.
Philips chief financial officer, Pierre-Jean Sivignon, says: ôFor Philips, selling our stake in TSMC is a logical consequence of our decision to exit the semiconductor business, to which end we made a first, significant step in 2006 when we sold a majority stake in our semiconductor division.ö Philips sold a majority stake in its semiconductor division to a consortium led by KKR in a $10.2 billion deal in 2006.
Philips was a founder of TSMC in 1987 with a stake of 51%, which it has diluted over the years. In August 2005, via an offering of ADSs Philips reduced its stake from 18.7% to 16.6%. At the time, Philips agreed not to sell any further TSMC shares in 2006 so as not to adversely affect TSMC's share price. But the overhang that Philips was a long-term net seller affected the stock through the year. Post the complete exit being announced, analysts commented the stock now stands to benefit from the clarity regarding Philips ownership and liquidity of the paper.
Pursuant to the announcement, the Philips representative on the TSMC board resigned on March 9. The announcement came the same day as TSMC announced monthly results. TSMC sales for February 2007 were down 14.3% compared to February 2006 and down 2% compared to January 2007 sales. The decline was in line with guidance issued by the company, leading some analysts to comment they thought the worst could be over.
Neither Philips nor TSMC representatives responded to further queries regarding details of the sell-down.
The semiconductor industry is generating large cash flow but is not being well discounted by retail investors - they still remember how volatile the financial performance of semiconductor companies can be. Cyclicality is inherent in the sector as demand often trails large investments in capacity.
The upshot is that semiconductor companies have become the darling of financial sponsors. A format which private equity has adopted is to delist the semiconductor company, lever it up taking advantage of existing low leverage and high free cash flow, then choose an opportune time to relist. The most recent transaction in Asia was in December 2006 when Carlyle announced it would make an offer to buy out shareholders of TaiwanÆs Advanced Semiconductor Engineering. Carlyle is acting in concert with ASE founder, Chang. The transaction is awaiting regulatory approval in Taiwan.
Analyst William Trent, author of www.stockmarketbeat.com, is concerned that ôthe industry growth rate has slowed dramatically, and many in the industry donÆt seem to realise itö. Trent welcomes the interest of financial investors in the industry commenting ôthey will bring a discipline the engineers lackö.
Given the interest of financial sponsors in building up large positions in semiconductor companies, Philips and TSMC have probably chosen a good time to take this step. There could be a queue knocking at their doors for the shares already.
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