hynix-returns-to-the-equity-markets

Hynix returns to the equity markets

Market environment forces smaller-than-anticipated deal; company to raise only $300 million.
Eight months after completing its last share offering, Hynix Semiconductor is back on the road with an equity deal that could raise as much as $1.4 billion based on yesterdayÆs closing price and the initial price guidance.

The main aim of the sale is to allow the banks which bailed the Korean chipmaker out of bankruptcy (almost five years ago) to cash in a bit more of their holdings - but Hynix is also taking the opportunity to raise fresh capital to support its expansion needs.

According to sources, the just over 40 creditors are offering to sell a combined 43.1 million shares, which is equal to 9.6% of the existing share capital and worth about W1.13 trillion ($1.2 billion) based on yesterdayÆs market price.

On top of that, the company is issuing $300 million worth of new shares in the form of Global Depositary Receipts. An earlier plan to also issue convertible bonds has been scrapped due to the volatile equity market environment.

Merrill Lynch is the global coordinator for the offering and also joint bookrunner for the international tranche together with Credit Suisse, Deutsche Bank and Woori Investment and Securities. The domestic tranche will be managed by Daewoo Securities, Good Morning Shinhan Securities and Hyundai Securities.

In another nod to the current market situation, the creditors, led by Korea Exchange Bank, have settled for a deal size at the low end of a previously announced target to sell between 40 million and 62 million shares. As a result, they will still hold around 36%-39% of the enlarged share capital after this sell-down exercise depending on how many new shares will be issued.

They currently own 50.6% of the company after selling $1.9 billion worth of shares in October last year, which reduced their combined holdings by 23.4%. That sale was the first attempt by the banks to monetise their initial debt-for-equity swap after a quicker than expected restructuring effort saw the company released from the Creditors Restructuring Promotion Act in July 2005 û 18 months ahead of schedule.

Hynix itself has also trimmed back its expectations after initially saying it wanted to raise up to $700 million from a combined sale of equity and CBs. The number of new shares to be issued will depend on the final price as the aim is for the company to raise $300 million.

Market sources say the bookrunners are aiming to price the combined deal at a 5-9 % discount versus the market price after a three day roadshow that will take two separate marketing teams to Hong Kong, Singapore, London, the West coast of the US, Boston and New York. However, given the volatile market environment that range is flexible, they say.

As if to drum home the need for that flexibility, HynixÆs share price dropped 4.2% to a close of W26,200 on the first day of bookbuilding yesterday, while the broader market posted slight gains.

The share price has slumped 13% since the company announced the first details of the share sale on June 7, which is more than twice the decline seen in the Kospi index. It is also down 25% from its most recent peak in mid-May, although this can be at least partly attributed to the general decline in global equity markets during that period.

Some market watchers say this has only made the current valuations look more attractive, however. After yesterdayÆs drop, the stock trades at about 7.3 times its projected 2006 earnings, compared with about 11 times for its main rival Samsung Electronics.

The order book was said to be in good shape after the first day in Asia with very little price sensitivity.

Creditors too are unlikely to mind the share price decline too much as they are still sitting on significant gains compared with their initial invested costs. The stock is currently also trading 36% above the price fetched in their first divestment in October 2005, when the shares were sold at W19,300 or a 7.9% discount to the then market price.

And in fact, looking at the part of the semiconductor market in which the company operates, the situation is not that bad with prices expected to remain stable into the third quarter, according to average analyst projections.

ôThings are volatile, but the margins for NAND flash and DRAM chips has actually bounced off a March low so in terms of the sector the timing is probably better now than it was prior to the period of (general market) volatility,ö says one observer. ôIn fact this sector is one of the few bright spots in the market right now.ö

The outlook for the stock for the second half of 2006 and going into 2007 is also quite positive, and the consensus target price among analysts is around W40,000. UBS, which updated its forecasts as recently as last week, estimates the stock will reach W48,000 within the next 12 months.

The final price on the share sale as well as the split between the international and domestic tranches are expected to be fixed by Tuesday (June 27). According to one source, international investors are currently expected to get about 60% of the total offer, which would be similar to the first sell-down in October last year.

However, if global hedge funds remain as absent as they have on other recent deals, including two out of Korea in the past couple of weeks, Hynix may have to allocate more shares in favour of domestic investors, who are flush with liquidity at the moment.

ôHedge fund demand is very important for generating momentum in the bookbuilding as they tend to come in early in the process in return for a guaranteed allocation,ö says one banker who is not working on the deal. ôLong-only funds tend to commit much later.ö

However, Hynix has emerged from the restructuring programme not only as a financially healthy company but as one of the top three players in its industry, which means it now attracts a lot of attention and interest both from the research community and from global investors. Aside from the extensive marketing effort ahead of the first sell-down, the company has also done a lot of investor relations work, including non-deal roadshows, since then, which has made investors more familiar with the story and also more comfortable that the recovery is sustainable.

As part of the attempts to rid itself of a debt burden that at the time of its collapse in 2001 stood at $10 billion, Hynix has been trimming costs and holding back on capex. In order to still keep up with the technology advances it has adopted a fab-lite strategy that has seen it outsource chip production to a 12ö fab owned by ProMOS and establish a joint venture with STMicroelectronics for a 12ö fab in China.

ôHynix had to become a lot more creative and inventive as to how to get more use out of its existing equipment and while people previously felt it had underinvested, they now realise that through necessity the company actually set a new benchmark for cost of production and everyone else is now trying to catch up,ö says a source with insight into the company.

Another strategy that has paid off is its early migration into NAND flash storage chips as a means to achieve higher margins. It is currently a top three player globally for this product behind Samsung and Toshiba to complement its number two spot behind Samsung on DRAM memory chips. NAND chips, which are used in everything from laptops and digital cameras to camera handsets and iPod nano players, are experiencing the highest growth rates in the chip industry at the moment and are projected to overtake DRAM by next year.

While there had been some speculation that the creditors had retained just above 50% of Hynix after the previous sell-down in order to enable them to seek out a strategic buyer for the entire remaining stake û and thus command a premium to the market price - observers said yesterday that was never really a serious option at this stage.

For one, HynixÆs market capitalization of about $12 billion means there are very few buyers, who also have the industry knowledge, that could afford to buy half the company. The observers also noted that so far, no buyer has emerged expressing a desire for such a transaction.

ôThroughout the restructuring there has always been a recognition that this is a company that is best positioned by being truly independent with a large freefloat. The issue is not actually who owns them, but that they have access to the debt and equity capital markets that can help them to continue to grow,ö one source says. ôBeing folded into any other company would restrict that ability to grow.ö

However, a slightly smaller strategic trade could still happen in the future as the creditors will hold more than 35% of the company after this deal û a stake that is generally regarded as giving the buyer enough influence to warrant an acquisition premium.

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