Philips divests TSMC stake

Dutch group gets record tight discount in difficult markets.

Koninklijke Philips Electronics sold 100 million ADS units in Taiwan Semiconductor Manufacturing Company (TSMC) after New York's close on Monday, raising $1.077 billion to pay down debt. With TSMC's two house banks, Goldman Sachs and Merrill Lynch, as lead managers, the transaction was priced flat to the group's $10.77 ADR close and at a 7.6% premium to stock's underlying close of NT$68.

The transaction was completed against a backdrop of difficult global equity markets, which helped pushed the ADR down 5.7% over New York's trading day ahead of pricing. This makes TSMC's achievement all the more impressive given that it has never before been able to price a follow-on offering flat to secondary levels.

The previous record was set in July, when the National Development Fund sold a 79 million unit stake at a 0.67% discount to spot after watching the ADR slide 6% over the course of the trading day. Goldman and Merrill also led this deal, which raised $945 million and was completed at $10.40, representing a 16.13% premium to the stock's underlying close.

One of the most noticeable differences between the July and November deals is the contraction in the premium between the ADR and local shares. Having once traded regularly over 40%, the ADR premium has come down significantly in recent years.

The latest slide occurred just over a month ago when the Taiwanese government lifted QFII restrictions and since then, it is said to have traded in a 10% to 15% band. At the announcement of the new deal, the premium stood at 13.47%.

But both Philips and TSMC are likely to be highly satisfied with the new trade. Philips has successfully divested a 2.5% stake, reducing its holding in the group from 21.6% to 19.1%.

And TSMC has achieved one of its cherished strategic aims of widening its investor base. The leads are said to have worked hard to un-earth new investors, a task that gets ever more difficult with each new trade. TSMC has a widely held and extremely liquid ADR particularly with US funds.

This time round, the leads targeted Europe, where 25% of paper was placed. A further 10% went to Asia and 65% to the US. Back in July 75% was placed in the US, 15% in Europe and 10% in Asia.

A total of 152 investors participated and just under one third were said to be new to the group. Books closed one-and-a-half times covered after an accelerated book build.

Having launched the deal after Taiwan's close on Monday, the leads indicated they might market it over two days. But they later decided to close at the end of New York trading to avoid further execution risk in the face of soft market conditions.

While Asian markets had traded flat to slightly down on Monday, Europe and the US fell more heavily after German DRAM manufacturer Infineon signalled cautious guidance on the release of its third quarter results. As a result, the Philadelphia Semiconductor Index fell 3.7% and TSMC a further 2.7% under short selling pressure.

On Tuesday the stock followed the market down from NT$68 to NT$66. At this level, the group is trading just over four times 2003 book and while the valuation is rich, most houses still have a strong buy recommendation.

Philips will now be subject to a 180 lock-up and there is no greenshoe attached to the current deal. Alongside the leads, co-managers are ABN AMRO, Bank of America, Credit Suisse First Boston and JPMorgan.

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