One of the largest rights issues ever in Singapore was announced at the crack of dawn yesterday. Singapore- and Nasdaq-listed Chartered Semiconductor woke the market out of its Summer lethargy with the announcement of a $634 million deeply discounted rights issue.
The world's third largest semiconductor manufacturing foundry needs to raise the funds to stay in the game against its ultra-efficient competitors, TSMC and UMC of Taiwan. Both the Taiwanese companies have already started producing 12 inch (300mm) wafers, double the size of the previous standard, and Chartered needs to catch-up.
The deep discount is a reference to the fact that existing shareholders are being asked to subscribe for new stock at a 52.4% discount to the company's market price of S$1.63.
The major shareholder, government-controlled Singapore Technologies, has committed to subscribe for its rights. Given it controls 60.5% of the company this amounts to a $383.5 million capital infusion.
Merrill Lynch is the lead manager and underwriter on the deal and has committed to a hard underwriting. That is to say, it is putting almost as much capital on the line as Singapore Technologies.
Some might describe this as a fairly gutsy move by Merrill as, according to market talk, it hasn't sounded out any of Chartered's institutional investors on what they think of the proposed deal.
Put at its simplest, this is a massive undertaking in a corporate finance sense. Even though Chartered is nowhere near bankruptcy (indeed it has $830 million of cash and undrawn credit facilities of $620 million), this new equity raising amounts to 38% of its market capitalization. Infusions of new equity that large normally only occur when you are recapitalizing a company in severe trouble (such as Hynix).
Chartered is ultimately owned by Temasek - the investment vehicle of Singapore Inc - and beyond the numbers, this indicates a strategic move on the part of the Lion State to avoid being marginalized in the semiconductor industry with a massive new investment.
What could prove interesting is to see how minority shareholders react to this vision. Those who do not believe in the vision, and fail to put up cash, will be diluted. On the flipside, they are being offered the chance to maintain their holding at a big discount; but nevertheless they are still being asked to put up fresh cash - and pension fund managers can be averse to that type of thinking in difficult economic environments.
In Chartered's case, the proposition is even more punchy. Having touched a high of S$6.30 in 2001, Chartered's stock price has been on a declining trend for the past year. It has never paid a dividend and has only made a profit in one year, 2000, when it made $$244 million and was trading on a PE of 40.69.
However, Chartered lost $383 million in 2001 and is forecast to make a loss of $389 million this year by UBS Warburg. Indeed, UBS Warburg put a sell on the stock at the end of July, while keeping holds on its main competitors, TSMC and UMC.
There are many who believe Chartered simply does not have the scale to survive and that eventually a merger with the likes of UMC is inevitable.
If you believe that kind of thinking, this rights issue may be interpreted as either dressing Chartered up to enter eventual merger talks in a stronger position; or else be viewed as a Singaporean last stand in the semiconductor field.
Chartered has an excellent client list - including names such as Motorola and Ericsson - but it took a wrong bet on communications chips and this has not helped.
As one analyst put it, Chartered simply needs more customers. Thus while TSMC has 70% capacity utilization, Chartered's is only 40%.
Put side by side with TSMC and UMC, Chartered does not fare well. The Taiwanese are a year ahead of the Singaporean firm in 12 inch fabs, and managed to finance the investments through free cashflow, as opposed to new equity. Meanwhile, Chartered has a gearing of 84% versus 16% for TSMC and 27% for UMC.
Chartered expects its capex to be $500 million for 2002 and $300 million next year. It is clear this rights issue is designed to keep the balance sheet in a reasonably conservative state and allow the firm to take advantage of upswings in demand should we now be at the very bottom of the cycle.
Existing shareholders have until October 7th to subscribe for their rights and tender new cash.
This is Merrill's second major capital markets exercise for Chartered, having launched a $350 million 5 year convertible bond for the company last March.