A Floor (and a Ceiling) for Semis
According to Eric Savitz, Morgan Stanley is out touting semiconductor companies on the basis of the Freescale (FSL) bidding war.
That’s good news for semiconductor stocks, Morgan Stanley’s Mark Edelstone notes in a research report this morning: he says that “private equity deals may serve to provide a floor for semiconductor stock valuations.”
Edelstone says that discussions with industry sources suggest that private equity buyers are willing to buy semiconductor companies at enterprice value-to-EBITDA multiples of 8x-10x. Based on calendar 2006 profit forecasts, he says 46% of the chip companies Morgan follows are trading below 10x; four are trading below 8x.
That may be, but the current shareholders of these companies aren’t going to accept a buyout with no premium. If you figure the average buyout will be at 9x EBITDA and you expect a 25% buyout premium to make speculating worth your while, you should only buy stocks trading below 7.2x EBITDA. Even then you should only buy the ones that might make the takeout boys salivate.
[Edelstone] concludes that “Semiconductor companies with rich product portfolios, solid competitive barriers to entry, strong cahs flows with limited cyclicality, and/or limited capital intensity because they either use trailing edge technology or employ a fabless business model should be attractive to private equity firms if they meet the valuation parameters to support their long-term return on investment thesis.”
So, how many of the stocks he listed were trading below 7.2x? ST Microelectronics (STM) clocks in at 5.8x, and AMD at 6.9x (if you don’t count the damage that may be done by the ATI acquisition). On Semiconductor (ONNN) and National Semiconductor (NSM) may make the cut on a forward-looking EBITDA basis.
So maybe for these guys it puts in a floor. For the rest of the industry, we’re calling it a ceiling.
Disclosure: William Trent has a long position in SMH.
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[…] With the announcement that Motorola (MOT - Annual Report) spinout Freescale Semiconductor (FSL) is being bought by private equity firms, the entire sector has rallied on hopes that any particular company will be the next to be taken private at a high premium. According to a recent Forbes article (that we found much more illuminating than most media stories): The unexpected reports that Freescale might be a takeout candidate certainly benefited its current investors. Shares shot up 20% to $37 to start the week and are still holding those gains. The potential that other companies might also be targeted could result in similar pops. Intersil shares are up 13% to $26.25 since the week began. Of course, we were quick to point out that those premium prices apply only when the price hasn’t already run up. By our logic, today’s Intersil buyer has already given 13% of the 20% premium to speculators. […]
[…] Trent presents A Floor (and a Ceiling) for Semis posted at Stock Market Beat. […]
[…] But aren’t valuations already down enough? Private equity firms thought Freescale was cheap, why not Maxim? Actually, we covered that argument last week. At 9.6x EV/EBITDA, Maxim is already trading at the high end of the valuation they might expect from a buyout. And that is before the EBITDA numbers get adjusted downward. If we assume a 10% hit to EBITDA and the 7.2x multiple we consider worth the speculation, well… call us when the shares are below $22. Disclosure: Author owns put options on the Semiconductor Holdrs ETF (SMH). […]
[…] Trent presents A Floor (and a Ceiling) for Semis posted at Stock Market Beat. […]
[…] But aren’t valuations already down enough? Private equity firms thought Freescale was cheap, why not Maxim? Actually, we covered that argument last week. At 9.6x EV/EBITDA, Maxim is already trading at the high end of the valuation they might expect from a buyout. And that is before the EBITDA numbers get adjusted downward. If we assume a 10% hit to EBITDA and the 7.2x multiple we consider worth the speculation, well… call us when the shares are below $22. Disclosure: Author owns put options on the Semiconductor Holdrs ETF (SMH). The author may hold a position in the securities discussed. A current list of the author’s holdings is available here. […]
[…] What a great reason to invest. Yet it isn’t the first questionable buyout this year, nor do we expect it will be the last. Starting with massive buyouts of highly cyclical semiconductor firms and continuing to the largest ever real estate buy when most concede the market has topped, Private Equity funds are showing that they simply have too much money to invest. We highly doubt the future returns on private equity investments will even approach the levels of past returns, as the hot money is unlikely to find sufficient real value opportunities to be put to good use. The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA - Annual Report; Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; Ceradyne (CRDN); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Lion’s Gate (LGF) call options; Dell (DELL) put options; Ceradyne (CRDN) call options; Plantronics (PLT) put options; […]
[…] Merrill Thinking What We’re Think on Semi Buyouts Back when Morgan Stanley got excited about the Freescale buyout, we threw some cold water on the idea, saying “If you figure the average buyout will be at 9x EBITDA and you expect a 25% buyout premium to make speculating worth your while, you should only buy stocks trading below 7.2x EBITDA. Even then you should only buy the ones that might make the takeout boys salivate.” It seems that line of thought is catching on. Tech Trader Daily » Buyout Of Chip Fab UMC? No Way, Says Merrill Lynch Shares of United Microelectronics (UMC), the Taiwanese contract chip maker better known as UMC, have appreciated recently on speculation that the company could be a potential buyout target. But Merrill Lynch’s Daniel Heyler this morning warns that those hopes are likely to fade - and that the stock is likely to retreat. Heyler says the company does not look very appealing as a buyout candidate, anyway. “Applying our takeover screen, UMC ranks 19 out of 27 Asian-based companies,” he says. “UMC scores low in terms of net cash to market cap and FCF (free cash flow) margin. At 7.1x EV/EBITDA, valuation is higher than all of the top-ten ranked companies.” […]
[…] Ever since the Freescale buyout, firms have been coming out left and right with their lists of the next buyout candidates. Prudential is the latest to join the fray, reports Tech Trader Daily: “[S]emiconductor comapnies and their balance sheets are being managed too conservatively relative to the lower risks they now face,” he writes. “[I]f semiconductor boards don’t rationalize balance sheets to reflect their lower risk profiles, then LBO firms may step in and do it for them.”Lipacis lists five stocks with “the most opportunity for upside through more efficient use of their balance sheets: […]