The company, which was founded in early 2003 as a 50-50 joint venture between TaiwanÆs Nanya Technology Group and EuropeÆs largest chipmaker, Infineon Technologies, ended up raising $421.2 million that will help pay for equipment at its second fabrication plant that is currently under construction.
Citigroup and Morgan Stanley were joint bookrunners for the deal, which was the largest GDR by a Taiwan semiconductor company ever. If one includes panel makers, it would be the second largest since Chi Mei Optoelectronics raised $751 million from a GDR in June 2005 with the help of Morgan Stanley.
Inotera initially offered to sell between 33.5 million and 40 million Global Depositary Receipts û each accounting for 10 shares û at a price equivalent to NT$30 to NT$34 per Taiwan-listed share.
After a week and a half of bookbuilding the deal was priced last night (May 10) at NT$33 per share, which represented a discount of 7% to yesterdayÆs Taiwan close of NT$35.50. The price was identical to that in the earlier IPO.
In dollar terms, that meant a price of $10.53 per GDR. The final deal size was fixed at the top end of the range at 40 million GDRs.
The price values the company at about 1.5 times the consensus 2006 book value (as compiled by IBES), which puts it at a premium of about 11.9% versus its closest comparable Powerchip, which as of yesterdayÆs close was quoted at a forward P/B multiple of 1.34.
A richer valuation is seen as warranted because of InoteraÆs more direct technology exposure, its lower costs and higher margins, which makes it a better quality asset, industry observers say. When the deal was launched on May 2 the premium was actually a much heftier 31%, but as the two stocks moved in opposite directions during the roadshow the gap narrowed, increasing the attractiveness of the Inotera offering.
The book ended up being about two times covered with more than 100 investors having placed orders, a source familiar with the deal says. About 64% of the demand came from Asia, while the US accounted for 25% and Europe roughly 10%.
The issue will help boost the foreign ownership to just over 17% from a virtually non-existing 0.5% following the domestic IPO - indeed, this was part of the reason for doing a GDR this close to going public.
Market sources say the company had thought about doing a concurrent domestic and international offering, but realised it would take too long to put it all into place and decided to split them up in order to ensure it would get the cash needed for its capex outlays in time.
The company is estimating its capex needs this year at about NT$27 billion ($862 million), or 17% more than last year. Most of the money will be spent on its second fab which is expected to begin mass production in the second quarter of 2007 - although a smaller portion of capex will go towards a technology upgrade at its existing plant.
By 2010 its total investments into the two plants will exceed $6.2 billion, company President Charles Kau told an investor conference in mid-March. Less than half of that had been spent by the end of 2005, he told fund managers.
The company raised NT$6.6 billion ($210 million) from the sale of a 7.4% stake in the company at N$33 apiece in March.
This is the shortest time between an IPO and a GDR. Since the offers targeted different investor groups, this had no real implications for the demand, but did add a few additional restrictions on the GDR. For one, the bookrunners were unable to use a greenshoe since the majority shareholders, who would normally supply the secondary shares for this, were still bound by a post-IPO lockup.
Existing shareholders were also prohibited from selling short of the stock ahead of the upcoming offer, which meant arbitrage trading - making use of the price gap between the common share and the new GDR - wasnÆt possible. This virtually ruled out a big participation by hedge funds in the GDR sale.
The closeness in time also posed a challenge for the bookrunners in terms of how to price the stock, especially since it has been very volatile. Since listing, it has fluctuated between a price in the low NT$20s and the high NT$30s.
Investors were said to be attracted to the company because of its high-growth story, the fact that it is a pure memory foundry and that it is able to produce its chips at a lower cost than comparables firms. The latter is a direct result of the successful combination of parent company Nanya TechnologiesÆ mass market approach and InfineonÆs superior technology.
The strength of the management and its ability to convey the companyÆs story also played an important role, one observer says.
ôThey really gave the impression that they have their finger on the pulse of the DRAM (dynamic random access memory) industry,ö he reckons.
The company posted a 558% gain in net profit to NT$5.93 billion ($189 million) in 2005 on the back of a near four-fold increase in sales revenues. In the first quarter of this year, it recorded a net profit of NT$2.4 billion.
Ultimately though, whether investors are buying into the sector at all depends largely on their view of the DRAM industry. Some industry watchers see selling prices softening again in the second quarter after a rebound in the first quarter. Prices fell nearly 50% in 2005 due primarily to oversupply.
However, some analysts argue that as rivals shift their production to other types of memory chips, low-cost producer Inotera, which is the only Taiwanese DRAM maker that has stayed profitable since early 2003, should come out ahead.
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