Who Cares About HCA? Silver Lake, KKR Make Five Fold Gain on Avago Investment

With all the fuss about the HCA IPO last week, I thought it would be fun to look at a company that has performed well under its PE ownership and still produced a generous gain.

For your consideration, Avago Technologies.

Silver Lake, KKR and Temasek Capital acquired Avago, which makes chips used in products like cell phones and computer servers, in 2005 for $2.7 billion. They invested roughly $1 billion of equity.

Two years later, as the broad markets were recovering from the financial collapse, Avago went public. It raised $648 million in August 2009. Silver Lake and KKR sold a 17% stake in the offering, receiving $336 million in proceeds. Temasek sold about 3% and realized about $35.6 million. The PE firms retained a 72% stake in Avago. Deutsche Bank, Barclays, Morgan Stanely and Citi were bookrunners on the IPO.

Since that time, the consortium has sold stock five times. The first occurred in January 2010 when KKR and Silver Lake—via an entity called Bali—sold a roughly 10% stake, or about 22 million shares. Temasek (through an entity called Seletar) sold a 1.4% stake, or about 3 million shares. Silver Lake-KKR realized about $390.9 million from the sale, while Temasek made $52.1 million.

The second sale came in August 2010. Silver Lake-KKR offered 5%, making $244.8 million, while Temasek sold 0.7% (237,444 shares) for $32.64 million. With this sale, just a year after the Avago IPO, KKR, Silver lake and Temasek had already recouped their $1 billon investment.

But the buyout shops didn’t stop. Four months later, in December of 2010, Silver Lake-KKR sold another 10%, netting about $594 million. Temasek, meanwhile, offered 1.3% and received $78.4 million.

In January, Silver Lake-KKR offered 8.4%, realizing $568.9 million, while Temasek sold 2%, gaining $137.3 million. The PE firms again sold stock this month. Silver Lake-KKR offered another 8.4%, realizing about $666.3 million. Temasek offered 1.1% for $87.75 million.

In all, the PE firms have realized about $3.1 billion in proceeds from the IPO and secondary sales. Silver Lake-KKR still retain a 22% stake, which is valued at $1.65 billion. Temasek, meanwhile, holds nearly 3%, valued at $216 million.

“This deal is a huge home run for the PE firms,” one banker says.

Avago’s fortunes have also improved since the IPO but much of this is probably due to the broad market rebound. In February, Avago reported first quarter profit of $119 million, up from $38 million a year ago. Net revenue was $550 million. Total liabilities are $327 million. Shares have more than doubled since their $15 IPO price.

By comparison, Avago had $693 million revenue for the six months ended May 3, 2009. The company reported a $25 million net loss for the time period. Long term debt and capital lease obligations, as of May 2009, were $704 million, according to SEC filings.

Ed Snyder, an analyst at Charter Equity Research, says Avago has performed “pretty well” since its IPO in 2009. “The overhang of the PE guys hasn’t helped the stock much,” he says. “But everyone in this space has been doing well. A lot of capacity came out of the 2008 downturn.”

Avago, Snyder says, has performed as well as rival TriQuint but not as well as Skyworks. Avago “has been an average performer for a semiconductor company,” he says.

Officials for KKR, Silver Lake declined comment.