Analyst: NXP Valuation May Be Too Rich

NEW YORK (Reuters) – Private equity owners may be asking too much for the shares of chipmaker NXP Semiconductors NV NXPI.O.

The company has high debt relative to competitors and the cyclical nature of the industry makes it vulnerable to downturns.

NXP’s shares would come to market at about 10 or 11 times earnings calculated on an annualized basis, and when certain one-time charges are excluded, Paul Bard, an analyst at Connecticut-based IPO research house Renaissance Capital said.

Competitors, including Analog Devices Inc (ADI.N), Texas Instruments Inc (TXN.N) and STMicroelectronics NV (STM.PA), trade at an average of 12 to 13 times earnings, Bard added.

“Because of the concerns over leverage and overall trends in the chip industry they are going to need to give investors a pretty good price and I’m not sure if that price that they’re coming to market at is going to offer a big enough discount,” Bard said.

KKR and other private equity firms have four large U.S. initial public offerings in the pipeline. NXP’s IPO, the first deal up, is expected to price next week.

Renaissance’s Bard said that private equity firms need NXP to be successful.

“It gives the PE (private equity) firms an added incentive to make sure this deal is a success because the last thing they want is for investors to have a bad taste in their mouth when they bring these next few deals public,” he said.

NXP plans to sell 34 million shares for $18 to $21 each. The company has said it hopes to raise about $663 million, which is far less than the up-to-$1.15 billion deal the company filed to do in April.

“When the price is lower than you would like you reduce the size of your offering and you possibly pull the offering but the first thing you do is you reduce the size,” said Steven Kaplan, a University of Chicago finance professor who specializes in private equity.

Private equity investors in NXP include Kohlberg Kravis Roberts & Co (KKR.N), Bain Capital, Silver Lake Partners, Apax and AlpInvest Partners.

Chip makers reported rising sales in the second quarter, as customers that had sharply cut orders amid last year’s economic downturn replenished inventories.

But shares of chipmakers in recent weeks have failed to rally much even when the companies have reported better-than-expected results, amid fears demand will slow in the highly-cyclical industry.

NXP, whose customers include Apple Inc (AAPL.O), Bosch, and Huawei Technologies Co Ltd [HWT.UL], posted a 66 percent increase in sales in the first three months of the year compared with a year earlier. But sales fell in each of 2007, 2008 and 2009, and the company has never posted a net profit.

“This is a very highly leveraged firm in a very volatile business,” said Morningstar IPO analyst Michael Gaiden.

“It is a dangerous elixir to mix the two because if your operating results have a lot of variability you don’t want to necessarily have regular payments of large interest or principal that would potentially put the firm in financial stress in downward cycles,” Gaiden added.

The Dutch company had debt of $5.2 billion and $8.1 billion worth of total assets as of April 4, for a debt-to-asset ratio of around 0.64.

Rival Analog Devices has debt of about $380 million, and assets of $3.928 billion, for a debt-to-asset ratio of around 0.1.

Lead underwriters on NXP’s IPO are Credit Suisse, Goldman Sachs and Morgan Stanley.

Deutsche Bank lost its underwriting slot in April because it refused to renew a $60 million line of credit for the chipmaker.

Other big private equity deals in the pipeline are: hospital operator HCA Inc, which filed for an IPO of up to $4.6 billion, Nielsen Holdings BV, which is known for viewership ratings that often determine the fate of TV shows and filed for an IPO of up to $1.75 billion, and Toys R Us, which filed for an IPO of up to $800 million. (Reporting by Clare Baldwin, additional reporting by Alexei Oreskovic in San Francisco; editing by Carol Bishopric)