TSMC offers 4.65% of its shares through ADRs

The offering, which is part of Philips' planned exit from the contract chip-maker, could raise up to $2.5 billion based on current market prices.
Taiwan Semiconductor Manufacturing Company (TSMC) will kick off a short roadshow today for the sale of around $2.5 billion worth of American Depositary Receipts (ADRs) that will see Royal Philips ElectronicsÆ stake in the company drop from 12.8% to 8.1%.

The sell-down is part of a long-term plan by the Dutch provider of healthcare, lifestyle and technology products to divest all of its shares in the Taiwan chip-maker that it helped to start 20 years ago. According to an earlier announcement, the pending international offering is the last time it will sell shares through ADRs, however, which could help boost interest in the transaction.

Most observers expect there will be no shortage of buyers, however.

ôThis should be a no-brainer,ö says one banker. ôTSMC is one of the bluest bluechips in Asia, the transaction has been heavily flagged and it accounts for no more than 10 trading days in all.ö

The deal will be jointly arranged by Goldman Sachs and JPMorgan and should help improve their overall standings in the league tables, at least in terms of market share. They are also set to pocket a handsome income from the transaction, which sources say will pay a fee of about 1.5%. Based on todayÆs share prices, that could result in as much as $37 million to share between the bookrunners and the syndicate of co-managers.

According to an SEC filing, the offering will comprise 240 million ADRs, which each equal to five common shares that are provided by Philips. Accordingly, the company will receive no proceeds from this sale at all. The deal will account for about 4.65% of the company and based on TuesdayÆs ADR close of $10.50, the total deal size could total as much as $2.52 billion assuming no discount to the market price.

Depending on the demand, it would be reasonable to assume at least some discount to the existing ADRs, however. The final price is expected to be determined after the close of US trading on May 17 after a one-week roadshow that will make use of two marketing teams to cover Asia, as well as Europe and the US.

A source close to the offering said the company had elected to do a fully-marketed deal to be able to capture as many long-only funds as possible and get the ôrightö mix of shareholders. It has found, the source says, that many long-only funds arenÆt able to participate in accelerated bookbuild transactions because of the need for a quick decision and that too much of the deals then go to hedge funds.

Based on TuesdayÆs close in the US and Taipei respectively (and using the exchange rate set in the SEC filing), TSMCÆs ADRs are currently trading at a 2.4% premium to the underlying common stock in Taipei. The latter was unchanged at NT$68 yesterday after the announcement of the sale.

TSMC is up marginally this year, but have fluctuated widely from a high of NT$71.20 in mid-January to a low of NT$63.30 in early March. It has risen 28.5% from its lows in July last year, compared with a 25% gain in TaiwanÆs benchmark index.

The offering comes only two months after Philips sold $1.75 billion worth of common shares in the domestic market, but at a time when analysts are projecting a turnaround of the semiconductor sector. With the trough in the first quarter not being as deep as some people had feared, the turnaround in the second quarter is now expected to be robust as inventories have are now pretty low, one observer says.

In connection with its first quarter earnings release, Texas Instruments noted that it wants to outsource more of its chip manufacturing and analysts believe this will remain the trend across the semiconductor industry as companies strive to keep their costs down.

Other selling points will include TSMCÆs leading position in the market both in terms of production and technology advances and its strong cash-flow.

ôTSMC isnÆt growing at 40%-50% anymore, but it is managing 15%-20% growth which is fast for a company this size and it is generating a lot of cash,ö says one observer, noting that the management is looking at paying more dividends.

TSMCÆs first quarter revenues decreased by 16.6% to NT$64.9 billion, but was slightly above the companyÆs own guidance. Net income fell by 42.2% to NT$18.8 billion.

ôA majority of our customersÆ excess inventory as been worked through in the first quarter and the recovery of our business is already in place,ö Vice President and Chief Financial Officer Lora Ho commented at the time of the release. She also guided that revenues are expected to rise by 12.5%-15.5% to between NT$73 billion and NT$75 billion in the second quarter.

Philips announced in early March that it intends to sell its entire remaining stake in TSMC, which at the time stood at 16.2% The sale to domestic institutions, which was arranged by Goldman Sachs and completed at a 3.2% discount to the market, was the first leg of that sell-down. The ADR will be the second.

Philips intends to sell part of its remaining shares through a buy-back program that will see TSMC buy and cancel $1.5 billion worth of its own shares during the course of this year. The company has said it intends to make further buy-backs between 2008 and 2010 and Philips intends to participate in these too.

Philips was a co-founder of TSMC back in 1987 with a 51% stake, which it has diluted over the years. A final sell-down had been expected for some time after the Dutch company decided last year to exit the semiconductor business to focus on other parts of its business.

Based on data compiled by Dealogic up until May 4, Goldman Sachs is currently third in the overall ECM league table for Asia ex-Japan, having arranged $4.12 billion worth of deals. Assuming the TSMC transaction is successful, it will likely surpass Morgan Stanley, which is second with $4.26 billion, but is unlikely to be able to unseat UBS at the top. The latter had $5.2 billion worth of league table credits as of last Friday, but this didnÆt include the $297 million placement by Greentown China on which it had joint books.

JPMorgan is fourth in the league tables with $3.0 billion worth of credits.
¬ Haymarket Media Limited. All rights reserved.

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