In what represents the company's first secondary offering since its listing on the New York Stock Exchange in September 2000, a 47.538 million ADS offering was priced last night (Thursday).
With Lehman Brothers as lead manager, the transaction was executed under a particularly rapid time frame with the aim of trying to minimize stock disturbance. Consequently, books were opened at 7.45m New York time and closed twice covered at 8.30am, with allocations completed an hour later.
Similar to TSMC, which launched a $1.001 billion ADR issue in early February, the $439.75 million offering marked a secondary sell-down by the National Financial Stabilization Fund. Disposing of a 1.8% stake, the fund sold the ADRs at a 5% discount to Wednesday's $9.25 close and at a 30% premium to the stock's NT$52 close earlier in the day in Taiwan.
One ADR equals five shares and co-managers comprised Morgan Stanley and ABN AMRO.
In comparison to recent TSMC divestments, the discount achieved by UMC seems relatively wide at first sight. TSMC's February sale, for example, was priced at a 1.3% discount to last sale, while two accelerated placements of November and June 2001 were completed at respective discounts of 0.743% and 0.86% to spot.
However, UMC differs in a number of key regards, not least because it adopted a completely different marketing strategy. In February, the Taiwanese government and TSMC management decided to embark on full global roadshows, during which time the company's ADR price fell from $17.59 to $16.75 and in the final run up to pricing, the premium to underlying contracted from 43% to 33.8% as investors put their shorts in place.
By comparison, the current deal was completed with no forewarning and hence no short selling, so that the premium remained at its historical average of about 30% to the underlying. In this respect, the new deal is more analogous to TSMC's two previous accelerated placements. But its wider discount reflects a much larger nominal size and a greater percentage of the free float - 46%.
Launch of the deal came off the back of positive statements from both TSMC and UMC management about a brighter industry outlook and capacity utilization rates. At a Merrill Lynch investment conference earlier this week, UMC officials forecast that the company will be able to increase capacity utilization rates from between 55% and 60% during the first quarter to 70% during the second.
Yet a number of outside observers expressed surprise that a deal emerged on Thursday, since the tech sector had been hit the night before, with both the Nasdaq and Philadelphia Semiconductor Index closing down on series of analysts' downgrades. JPMorgan, for example, reduced its earnings forecasts for Intel Corp, arguing that price cuts rather than improving demand are underpinning its recent performance, while Morgan Stanley put a sell recommendation on the whole semiconductor sector.
As a result, the TSWE fell 0.3% on Thursday to close at 6070.50, but remains up 9.354% on the year. UMC itself is up 1.96% year-to-date, but continues to underperform on the upside, with TSMC up 6.29% year-to-date.
The leads, on the other hand, wanted to take advantage of what was perceived as a closing market window for the stock, which has run up NT$15 over the past month and appears to be topping out at current levels.
Over the medium term, supporters say that the industry consensus among analysts is for a target price of $12 to $15.
