NXP Semiconductors to Acquire Freescale for $11.8 Billion

by Ed HammondJack ClarkIan King

(Bloomberg) -- Dutch chipmaker NXP Semiconductors NV agreed to buy smaller U.S. rival Freescale Semiconductor Ltd. for about $11.8 billion in cash and stock to expand its market share in chips for cars and reduce costs.
Freescale shareholders will get $6.25 in cash and 0.3521 of an NXP share for each Freescale common share, the companies said Sunday. The deal values Freescale at $36.14 a share, almost matching the stock’s closing price Feb. 27 of $36.11. Including Austin, Texas-based Freescale’s debt, the purchase price is about $16.7 billion.
Both companies are major suppliers of chips for use in cars and are seeking to benefit as vehicles become more advanced, requiring more processors and electronics. The merged company, with about $10 billion in annual sales, would be the world’s eighth-largest chipmaker and would pose a bigger threat to Texas Instruments Inc. in the market for analog chips.

“If you want to make cars drive by themselves, then
the use of sensors is likely to grow exponentially,” Robin van den Broek, an analyst at ING in Amsterdam, said in an interview. “The deal will help the company in getting scale.”
Freescale shares rose 6.7 percent to the equivalent of $38.52 in German trading at 9:02 a.m. Frankfurt time. Its U.S. shares have risen 43 percent this year, closing at $36.11 on Feb. 27 to produce a market value of $11.06 billion. The return makes it the best performer on the Philadelphia Stock Exchange Semiconductor Index, which has gained about 4 percent.
NXP added 1 percent to the equivalent of $85.77 in Germany. Its U.S. shares have risen 11 percent to $84.90 this year.

Pooling Efforts

The deal could let the companies cut costs by pooling efforts in products for the automotive industry and combining manufacturing, said Stacy Rasgon, an analyst at Sanford C. Bernstein & Co. The deal will add to earnings at NXP with cost savings of $200 million in its first year and $500 million in the future, the companies said.
“You can imagine a number of synergies,” said Rasgon, who recommends buying Freescale stock and doesn’t cover NXP.
The offer values Freescale at 1.49 times its sales, compared with a median of 2.24 in similar deals over the past nine years, according to data compiled by Bloomberg.
NXP, based in Eindhoven, the Netherlands, and Freescale expect the transaction to be completed in the second half of 2015, subject to approval from regulators and shareholders.

Taken Private

The combined company would be a larger competitor for Texas Instruments in the markets for analog chips, microcontrollers and other types of semiconductors that are increasingly turning everyday items into electronic devices. Texas Instruments, which dominates that category, had $13.05 billion in sales last year.
“We fully expect to continue to significantly outgrow the overall market,” NXP Chief Executive Officer Richard Clemmer, who will serve as president and CEO of the new company, said in a statement.
For Freescale’s private-equity owners, the transaction is a partial exit as the company’s stock price approaches what it cost them to buy it eight years ago. After the deal, Freescale shareholders will own about 32 percent of the combined company.
Freescale was taken private before the financial crisis and, while it now has publicly traded shares, is 64 percent owned by private-equity companies including Carlyle Group, TPG Group Holdings and Blackstone Group. NXP, the former semiconductor arm of Royal Philips NV, was also taken private and returned to the market in a 2013 initial public offering. It has operations in more than 25 countries.

Motorola Past

Freescale, the former semiconductor arm of Motorola, saw orders dry up during the financial crisis, making it harder to service the debt that had been taken to fund the transaction that took it private in 2006. It reported losses on debt payments and cut staff and closed plants to reduce costs.
In May 2011, Freescale’s owners held a low-float IPO for a small stake to raise cash to restructure high-interest debt. There was a secondary offering in 2014. The company currently has a float of about 108 million shares, out of about 306 million outstanding, according to data compiled by Bloomberg.
Freescale’s biggest customer is Continental AG, the auto-parts maker based in Hanover, Germany, according to supply-chain data compiled by Bloomberg.
NXP was advised by Credit Suisse Group AG and law firms Simpson Thacher & Bartlett and De Brauw Blackstone Westbroek. Freescale was advised by Morgan Stanley and law firm Skadden, Arps, Slate, Meagher & Flom.