TSMC prices ADR sale at zero discount

At $2.56 billion, the sell-down by Philips is on par with the largest ever equity deal from Taiwan.
Taiwan Semiconductor Manufacturing Company (TSMC) has priced its latest ADR offering at par with the most recent close in the US for a total deal size of $2.56 billion after strong demand from both exiting and new investors.

In fact, after an initial dip, the ADR price edged upwards during the roadshow and the premium to the underlying shares in Taiwan actually expanded as the management was able to instil confidence among investors about the improving business outlook of the worldÆs leading contract chip maker.

From 3.09% at the start of the roadshow on May 10, the ADR premium widened to 5.2% at the close of trading on Thursday (May 17), which is when the deal was priced. The ADR price rose 1.4% in the same period, outperforming close rivals United Microelectronics (UMC) and Chartered-Semiconductor Manufacturing, as well as the Philadelphia Semiconductor Index, which all fell.

The ADRs were sold on behalf of Royal Philips Electronics as part of its earlier announced divestment of its entire remaining stake in TSMC, which it helped to start 20 years ago. As a result of this sale, the Dutch provider of healthcare, lifestyle and technology products will see its stake fall to 8.1% from 12.8%.

The deal was jointly arranged by Goldman Sachs and JPMorgan, who will get $17.5 million for their efforts based on the 1.75% fee and the final price. That money will have to be shared with six co-managers, however.

Sources say part of the enthusiasm for TSMC stemmed from the fact that this transaction has been flagged as the last sale of ADRs backed by Philips shares, which should remove most of the overhang on the share price. Investors are also said to like the fact that TSMC will put some of its cash to work through a $1.5 billion share buy-back programme during the course of this year. Since the company will cancel all the shares it buys back, this will have a positive impact on per share earnings and dividends.

Despite the large size, the deal was more than two times covered with very little price sensitivity, according to sources. The majority of the buyers were existing investors of either the ADRs or the Taiwan-listed common shares, although there was also good participation by investors who were already familiar with the company through various conferences, non-deal roadshows and one-on-one meetings but who had waited for the right opportunity to buy in, the sources say.

ôPeople do believe in the equity story even though there is always a debate about what part of the cycle we are in,ö says one source, noting that the recent guidance from the company with regard to the rest of the year was also taken positively.

Vice president and chief financial officer Lora Ho said at the time of the first quarter earnings that TSMCÆs revenues are expected to rise by 12.5%-15.5% to between NT$73 billion and NT$75 billion in the second quarter. The 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.

Given the large ADR premium, it was no surprise that Asian investors were a bit underrepresented and one source estimated that US investors had accounted for more than 50% of the demand, while European investors made up almost 30% and Asian investors close to 20%.

The offering comprised 240 million ADRs (each equal to five common shares), which were priced at $10.68.

ôAs the long-term ADR premium is only 3%-4% there was some concern about pricing the deal at a more than 5% premium, but at the end off the day the feedback from the roadshow was extremely positive and investors were seen to be fully capable of buying this stock at a 0% discount to the market,ö says one observer.

At that price, the deal ranks on par with the ADR sale by Chunghwa Telecom in 2005 as the largest equity deals ever from Taiwan. Depending on how exact one wants to be, the Chunghwa Telecom sale, which was arranged by Goldman Sachs, Morgan Stanley and UBS and took the governmentÆs stake below 50%, was actually marginally larger at $2.5636 billion, compared with the $2.5632 billion raised by TSMC.

But while large in absolute terms, the TSMC transaction only accounted for 4.65% of the outstanding share capital and 10 days worth of trading volume on Nasdaq and the Taiwan Stock Exchange combined. This explains why there wasnÆt more downward pressure on share price during the road show or following the pricing.

The ADRs fell 1.4% in FridayÆs trading to $10.53 û equal to the where it was at the start of the one-week roadshow - but then edged slightly higher again in the after-market trading to finish the week at $10.61. In Taiwan, the common shares traded up 1.2% to NT$68.50 on Friday, which left it NT$0.50 above the pre-roadshow close. Contrary to the ADRs, however, the TSMCÆs Taiwan-listed shares fell slightly while the deal was ongoing, reaching a low of NT$66.50 on Tuesday last week.

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 29.5% from its lows in July last year, compared with a 28.4% gain in TaiwanÆs benchmark index.

The share price has picked up since 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 first part of that divestment was a $1.75 billion placement to domestic institutions, which was arranged by Goldman Sachs and completed at a 3.2% discount to the market. The ADR was the second part.

Philips will sell the rest of its stake through TSMCÆs buyback programs, which will continue in 2008 to 2010 after the initial $1.75 billion worth of share purchases this year.

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 18, the TSMC transaction together with a combined placement and convertible bond issue for Gome has returned Goldman Sachs to the top of the overall ECM league table for Asia ex-Japan with $6.66 billion worth of arranged deals. The US investment bank, which was sole global coordinatore for the TSMC trade, swapped places with UBS, which slid to third over the course of last week, while Morgan Stanley remained in second place.

Morgan Stanley currently has $6.12 billion worth of league table credits, while UBS has $5.50 billion. JPMorgan remains in fourth place, having helped arrange $4.58 billion worth of equity transactions.
¬ Haymarket Media Limited. All rights reserved.

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