Roadshows for UMC's (United Microelectronics Corp) keenly watched debut ADR began at this week, with pricing under lead manager Morgan Stanley Dean Witter scheduled for Monday September 18. The company is offering 450 million shares on a five for one basis, equating to 90 millions ADS units, with the addition of a two million share greenshoe.
Joint lead is Credit Suisse First Boston, with ABN AMRO, Donaldson Lufkin & Jenrette (DLJ), ING Barings and Lehman Brothers as co-leads.
Indicative pricing has been pitched at a 10% to 20% premium to underlying shares, a lower than expected range considering that fellow IC foundry producer TSMC (Taiwan Semiconductor Manufacturing Company) has averaged a 50% premium over the past three months. However, similar to recent Morgan Stanley-led deals, the range has been deliberately pitched at conservative levels in the hope of generating price momentum that will enable it be raised prior to the close of roadshows in the US. A number of bankers have, therefore, concluded that the company will aim for 25%.
Bankers say that while initial feedback has been positive, a true picture of the book is difficult to forecast at this point since roadshows are only just starting in the US. "Outside of Japan, UMC is Asia's second most actively traded stock, with an average daily turnover of about $250 million," says one banker. "Most Asian accounts canvassed during the early days of the roadshow have QFI status in Taiwan and trade the stock locally. Similarly in Europe, fund managers will press for a premium towards the lower end of the range."
Critical will be the attitude of the US investors that hold up to $4 billion in TSMC's outstanding ADRs. The extent to which funds will switch from TSMC to UMC and bring down the former's premium to underlying shares divides bankers. Some argue that TSMC will maintain its historically high premium, while others argue that the advent of UMC as a diversification opportunity will destroy it.
"Over the longer term we think that TSMC and UMC will both average around a 30% premium to their underlying shares," says a US investment bank analyst. "If you look back to 1997 when TSMC first listed on the New York Stock Exchange it barely achieved a premium at all and for the whole of the first year only averaged a 13% level."
In terms of pricing over domestic shares, UMC could hardly have picked a worse time to proceed with the offering, although specialists argue that the continued decline of the Taiwanese stock market makes it all the more imperative that UMC establish an international investor base.
Jitters in the semiconductor sector that PC demand is declining, with little consequent upside for DRAM manufacturers caused has caused further declines in UMC's share price this week. In particular, DLJ's to place a sell order on DRAM manufacturer Micron reverberated throughout the whole sector, with both TSMC and UMC suffering from the fallout.
Having traded at NT$82.5 a week ago, UMC closed Thursday at NT$77 per share, down 17.5% on the year, against an overall fall in the Taipei weighted index of 12.048%. TSMC which also traded lower, closed the day at NT$125, down 3.81% on the year.
"UMC's and TSMC's domestic valuations are just horrible at the moment," one analyst concludes. "They both have firm value to ebitda multiples of about 19 times, against ratios of 30 times for US comparables. They normally trade at a slight premium to the US. TSMC is also trading at a 33% discount to its ADR. Domestically, both stocks are going nowhere, so they need the overseas listing."
Alongside UMC, Premier Image Technology Corp (formerly known as Premier Camera) also began roadshows this week. With ING Barings as lead manager, the company is hoping to raise roughly $80 million from its debut GDR.
Scheduled to price in New York on Thursday September 14, the company is offering 25 million new shares and five million existing shares on a discount price range of 0% to 10% over a yet to be announced average. Bankers say that the company is unlikely to price against spot because its share price has appreciated significantly over the past few months and additional flexibility is needed.
Alongside the Dutch bank, ABN AMRO has been named as co-lead, with Credit Lyonnais, National Securities and Nomura as co-managers.
The company, which transferred from the OTC board at the end of last year, is the world's largest camera manufacturer with a 15% market share. Bankers say that of all the big photographic names, the only companies that Premier does not manufacture for are Canon and Kodak which make their own cameras.
"Basically this is a company which blends Japanese quality goods, Taiwanese service standards and Chinese economies of scale as a result of its factories on the Mainland," says one banker.
Shares closed in Taiwan Thursday at NT$90, representing a year to date gain of 37.24% and backed by a market capitalisation of $757 million. In the year to July, the company also reported a 37% increase in revenue growth, equating to NT$5.24 billion.