China's push to build up its semiconductor industry has spurred acquisitions and brought previously low profile Chinese buyers to the fore.
Jiangsu Changjiang Electronics Technology became the latest to jump on the bandwagon on Thursday, when it made a non-binding proposal to acquire all the shares in Singapore's Stats ChipPAC for $780 million. According to a source familiar with the matter, Stats ChipPAC has about $1 billion in debt, putting the enterprise value at about $1.8 billion.
Stats ChipPAC and Temasek have agreed to negotiate on an exclusive basis with Jiangsu Changjiang until November 30. The proposed deal excludes Stats subsidiaries in Taiwan. According to the exchange filing, there is no assurance that the proposal will result in a definite agreement.
Stats ChipPAC has long been viewed as being on the block for sale but it has been a hard sell as the company is loss-making. "Lots of people in the industry have had a look at Stats and dropped out," said one senior banker. “It is a harder case to make as the business is not making money," he added.
Tianshui Huatian Technology, a previous bidder, had dropped out. Deutsche Bank and CICC are advising Jiangsu Changjiang. Citi is advising Stats ChipPAC.
As China looks to build up its semiconductor expertise, this has spurred take-private transactions. For the most part, the Chinese bidders have focused on US-listed Chinese companies, where they are comfortable with the management but have been slowly expanding the search as most of the obvious candidates have been bought up and the interest from Jiangsu Changjiang is example of this.
In addition to Stats ChipPAC, according to reports, China's Semiconductor Manufacturing International Corp is one of the bidders for Dongbu HiTek, which owns a foundry in Korea.
The government is lending a helping hand to help build up the semiconductor industry, as it seeks to reduce its imports of semiconductors. To support companies seeking to make investments within the semiconductor space, the Chinese government this year set up an Rmb120 billion ($19.6 billion) fund.
Since last year, funds have picked up the pace of activity, targeting US-listed Chinese companies. In July last year, Tsinghua Unigroup bought Spreadtrum Communications, a Shanghai-based cell phone chip designer. Months later, it paid $910 million to acquire another cellphone chip maker RDA in November last year.
Shanghai Pudong Science and Technology Investment (PDSTI) a state-owned enterprise under the direct administration of the Pudong district government in June struck a deal to buy US-listed Montage Technology, which makes set top boxes, for about $693 million.
In August, a consortium of investors including Hua Capital Management, a Beijing-based investment company and PDSTI submitted non-binding proposal that values Nasdaq-listed OmniVision Technologies which develops image sensors for cameras at $1.7 billion.
But aside from the push from the government, funds see an opportunity to reap rich returns. Unlike internet darlings such as Alibaba, Chinese semiconductor companies have been trading at trough levels and funds are seizing the opportunity to bring them back to list in China, where they could potentially command better valuations.
“What has motivated many of the Chinese semiconductor take-private deals, in addition to the organic growth of the businesses, is the perceived arbitrage between the valuations they traded at in the US and what they may be able to get when they relist in China,” said Daniel Wetstein, head of Asia Pacific technology investment banking at Morgan Stanley, the firm which advised Spreadtrum and RDA’s board of directors on the takeover offers. “Several of these companies will probably look at reverse mergers into A-share listed companies or IPOs within a short period of time,” he added.
The push among Chinese funds has not gone unnoticed with US chip giant Intel taking a 20% stake in Tsinghua Unigroup, which owns both RDA and Spreadtrum, for $1.5 billion in September. The deal was seen by one banker as a way for Intel, which lags on the mobile side, to boost its presence in China.
The investment also enabled Tsinghua to get a tidy wad of cash as it had paid $2.7 billion for both companies, and Intel's investment enabled it to recoup half of its original investment. "The Intel investment indicates what a successful investment this is promising to be for Tsinghua and this has emboldened other funds," said Morgan Stanley's Wetstein.
As the Chinese government looks to build up, bankers expect similar investments to continue. “Given the Chinese government’s push to create national semiconductor champions, I think other foreign companies would want to play a part as well,” said Winston Cheng, head of technology, media and telecommunications at Bank of America Merrill Lynch.