Following the purchase of NXP in 2006 by a group of private equity companies led by Wall Street company Kohlberg Kravis and Roberts, some 3.7 billion of dollar-delineated debt and some 2.7 billion of Euro-delineated debt in the form of high-yield bonds secured on NXP's assets were sold. Paying the interest on these bonds is now costing NXP $450-500m a year.
Asked how a company with $5 billion in revenues, with a targeted EBIT margin of 15 per cent, could sustain spending of $1 billion on R&D plus $450-500 million on debt service, Frans van Houten, CEO of NXP, told me: "Our opex is 30 per cent". So the operating expenditures, not including debt service, comprise 30 per cent of revenues.
Moreover, starting in 2013, as well as continuing to pay interest, NXP has to start repaying the principal debt. How can NXP afford to do that? According to van Houten: "We can re-negotiate that."
NXP's negative cash-flow of $830 million in the first half of the year was alleviated by an inflow of $1.55bn in July representing the proceeds of 80 per cent of NXP's wireless division which was transferred to NXP-ST.
Adding to this $1.55bn will be a further sum when the remaining 20 per cent of NXP's wireless operation gets sold to the ST-NXP-EMP wireless consortium. van Houten is not revealing how large he expects this further sum to be.
Asked if any of the money would be going to his owners or the bondholders, van Houten replied: "It can't go to the bondholders. The money stays in the company or we pay down debt."
Van Houten is confident that, whatever the trading situation, NXP can survive. But it's carrying a heavy burden.
Hi David, if you had a magic crystal ball, what future would you see in it for NXP? Any opinion on that?