NXP’s market thud doesn’t bode well for rival IPO

August 6, 2010

NXP hit the market with an ominous thud. Private equity backers had good reasons to accept a haircut in an IPO of the debt-laden chip company. But choppy markets made it worse than expected. The company had hoped to sell shares between $18 and $21 each. Instead, they priced at $14 — and then dipped further in early trading. The investor reception may put a kink in other potential mega-floats — especially that of rival Freescale.

Other big leveraged buyouts, such as Toys R Us, Booz Allen and HCA, appear to be on track to generate gains, if largely on paper, for their backers. NXP’s sale leaves its sponsors diluted. But that doesn’t make Bain, KKR and Silver Lake entirely foolish for proceeding with a deal that turned a $5.5 billion equity valuation into one of just $3.5 billion. For starters, by getting NXP to market, the firms will be in position to sell their stakes more quickly should chip valuations rise.

More significantly, NXP sorely needed to slash debt. The highly variable cash flow at chip companies means that borrowing too much can make it exceedingly tough to pay off interest or invest enough to avoid technological obsolescence in the inevitable busts. NXP’s sales are down 40 percent since 2007. It also hasn’t helped that rivals Texas Instruments and Analog Devices are net cash.

Debt buybacks and swaps haven’t been enough to steady NXP. The prospect of the equity offering at least eased a $1 billion debt offering earlier this year. The float also helped pare net debt to about $4 billion. And NXP should earn enough this year to keep the deleveraging going. The listing could even help it borrow on better terms.

But the price of cleaning up NXP’s balance sheet has been steep. The buyout firm owners of Freescale, a rival chip maker taken private at roughly the same time as NXP, face a similar dilemma. With $6.6 billion of net debt and just $146 million of cash flow from operations during the first half of the year, Freescale must decide whether to suck it up and brave the fickle markets. NXP’s experience won’t make the decision any easier.

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