Three private equity groups are expected to submit bids for the semiconductor division of Philips Electronics. While Philips had talked of a second-half IPO for the unit, the readiness of private equity groups to offer cash in a quick sale is a far more attractive proposition for the conglomerate than the uncertainties of a public offer in a difficulty equity market.
Philips’ semiconductor unit is expected to receive bids from three private equity groups.
Leaks to the Wall Street Journal and the Financial Times suggest that bids for the unit, which is likely to be the largest buyout of its kind this year, may go as high as $10 billion. Philips has chosen a good time to for a sale as the traditionally cyclical chip unit is on an upswing. Its second-quarter figures showed the unit’s earnings before interest and depreciation rose from E27 million ($33.8 million) to E120 million ($150.3 million) on sales up 12% at E1.2 billion ($1.5 billion).
The three groups expected to make bids are: Bain Capital, Francisco Partners, and Apax Partners; Blackstone, Permira and Texas Pacific Group; and a consortium including Kohlberg Kravis Roberts and Silver Lake Partners. The latter group has particular experience in the sector as it bought the semiconductors unit of Agilent Technologies for $2.66 billion in 2005.
Traditionally, private equity groups have been suspicious of each other, but with large prizes up for grabs and cheap money readily available they have shown an increasing willingness to band together. In 2005, a consortium of private equity groups took SunGard Data Systems private for $11.3 billion.
What is surprising is that, in a fragmented chip business, none of the other players have made an approach. According to the rankings compiled by analysts at iSuppli, Philips is the eighth largest chipmaker with a 2.4% market share, among many others with a similar lowly ranking. iSuppli noted the difference between Philips Semiconductor’s market share and 12th place Hynix Semiconductor’s market share was estimated to be only 0.11 of a percentage point in 2005.
Only the big three: Intel, Samsung Electronics, and Texas Instruments, can boast market share of more than 4% and it seems that none of the smaller companies have the ambition to close the gap by buying Philips’ chip business.