A Warburg Pincus-led follow-on in Nasdaq-listed RDA Microelectronics has raised $77.2 million after fixing the price at a 2.1% discount to the latest close. The deal was priced at the end of US trading last Wednesday.
As the second follow-on in a US-listed Chinese chipmaker in less than a month, the deal shows that investors are willing to look at deals by Chinese issuers that are already known to them and that are covered by research analysts. One source said there is no reason why share sales in listed Chinese companies that are offered at a discount shouldn’t get done, but that doesn’t mean that the US market is also ready to accept Chinese IPO candidates.
Only two IPOs by Chinese issuers have been completed in the US since the beginning of 2012 and investors have remained sceptical towards new names following the accounting scandals — alleged and proven — that have involved a number of US-listed Chinese companies during the past couple of years.
RDA Microelectronics’s share price fell 18.8% during the bookbuilding, including a 10.3% drop on the final day, which increased the attractiveness of the deal. However, it also reduced the amount of proceeds raised by the sellers.
The deal was further supported by IDG, a venture capital investor, which bought 12% of the offering at a cost of $9.25 million, according to the final prospectus. IDG, which is a long-term shareholder in RDA Microelectronics, said in a filing on March 26, the day before pricing, that it was willing to buy up to $15 million worth of shares in the deal.
The majority of the shares ― 95.8% ― were sold by Warburg Pincus. Like IDG, the private equity firm invested in RDA Microelectronics before it went public in November 2010 and has been the controlling shareholder with a 54.7% stake since the IPO. The fact that the share price fell so much during the bookbuilding seems to have mattered less to the firm than the opportunity to reduce its holdings. RDA has a market cap of just $455 million and the stock is thinly traded, making it difficult to offload a large position in the open market.
Last week’s sell-down accounted for close to one-third of Warburg Pincus’s holdings and will reduce its stake to 38%. Its remaining shares will be locked up for 90 days.
The other selling shareholder was an individual, Jun Chen, who is a senior vice-president of engineering at RDA Microelectronics. He too sold about one-third of his holdings, reducing his stake to about 1%.
The deal also included 100,000 new American Depositary Shares (ADSs) issued by RDA Microelectronics itself. They accounted for slightly more than 1% of the total deal size, which suggests that there was a technical reason for the company to sell. One possible reason is that it enabled the follow-on to be backed by a prospectus and also allowed the management to participate in the roadshow. In any case, the money raised by the company was negligible.
The 8.35 million ADSs on sale accounted for 17.3% of the company. Of the total, 8 million ADSs came from Warburg Pincus and 250,000 from Chen. Each ADS represents six ordinary shares.
The price was fixed at $9.25 per ADS, which translated into a 2.1% discount versus last Wednesday’s close of $9.45. By then, however, the share price had fallen from $11.64 on March 21, which was the last trading day before the deal was announced. By comparison, the share price of US-listed Vipshop, a Chinese online discount retailer for brands, fell just 3.2% during the marketing of its follow-on two weeks earlier.
RDA Microelectronics dropped a further 2.1% on Thursday after the deal, which took the market price level with the deal price.
The RDA Microelectronics deal comes with a 15% overallotment option that could increase the deal size to 19.9% of the existing share capital and the total proceeds to $88.8 million.
According to a source, the deal was multiple times covered, partly thanks to a number of one-on-one conversions from the roadshow. About two-thirds of the transaction went to the top-10 accounts.
Most of the demand came from US-based investors, while Asian investors contributed a smaller amount.
RDA Microelectronics is a fabless semiconductor company that designs and makes wireless systems-on-chip and radio-frequency semiconductors for cellular, connectivity and broadcast applications — technology that is increasingly in demand as mobile phones and smartphones become more powerful and sophisticated.
Its product portfolio includes power amplifiers, transceivers, Wi-Fi, Bluetooth and FM combo chips, set-top box tuners, mobile TV receivers, walkie-talkies and LNB satellite down-converters.
According to the company’s prospectus, it currently has more than 1,100 customers, most of which are based in China. They include handset manufacturers such as Huawei, ZTE, Lenovo, China Wireless Technologies and TCL, as well as top Chinese design houses. It has also started to sell certain products to non-Chinese customers, including Samsung and LG Innotek.
Its revenue has increased to $391.3 million in 2012 from $191.2 million in 2010, and its net profit has expanded to $52.9 million from $19.1 million in the same period.
This deal was almost identical in size to the company’s IPO, which raised $77.6 million. That deal was priced at $9 per share. The share price has been quite volatile since the listing, reaching a high of $15.72 in the first few weeks before edging downwards to a low of $6.85 in October 2011. Before the drop in the past week, the stock had been on a mostly upward path since early September last year.
The follow-on came after Vipshop and a number of its existing shareholders raised a combined $172.8 million in mid-March. These deals were the first two follow-ons by Chinese companies listed in the US since May 2011, according to a source. Hence they were an important test of investor appetite.
Vipshop had traded well since completing its offering ― at the end of March it was 26.5% above the deal price ― which may have helped boost the interest in RDA Microelectronics too.
The two offerings weren’t exactly the same, however. While the RDA Microelectronics deal was made up almost entirely of existing shares and therefore was viewed mostly as a liquidity event, some 56% of the Vishop transaction consisted of new shares, which meant an injection of fresh growth capital for the company.
Barclays, Credit Suisse and Morgan Stanley were joint bookrunners for the RDA Microelectronics offering, although Barclays had a largely passive role.