Question: Who can destroy $13 billion of industrial value in five years? Answer: A private equity company.
Yesterday’s $4.6 billion valuation of Freescale is in stark contrast to the $17.6 billion valuation put on Freescale when its owners, the private equity company Blackstone, bought it in 2006.
The $4.6 billion valuation comes as Blackstone prices Freescale’s upcoming IPO at $18-20 a share. When Blackstone bought Freescale it paid $36 a share.
Freescale will put 43.5 million shares up for sale representing 17% of the company.
The IPO price has already been reduced from an initial $22-24 price tag which, presumably, has found disfavour among underwriters.
The aim of the IPO is to raise $870 million to pay down some of the original $9.6 billion debt loaded onto Freescale by Blackstone after the takeover. The $9.6 billion of debt has since been reduced to $7.5 billion by buy-backs.
$764 million of the debt matures next year, which is why Freescale needs the money. None of the proceeds of the IPO are due to be invested in Freescale.
The original $9.6 billion debt forced Freescale to find an initial $750 million a year in interest payments.
Freescale has been unprofitable ever since the takeover, and made a $1 billion net loss last year.
Blackstone’s mistaken $17.6 billion valuation of Freescale in 2006 came from its using a metric known as ‘discounted cash flow’ which assumes future revenues at a certain level – a hazardous metric to use in the notoriously volatile semiconductor industry.
Blackstone was also pushed into over-paying because of competing interest from its fellow New York private equity company KKR.
Blackstone is being sued for not revealing, in its own IPO in 2007, the full extent of its exposure to Freescale’s valuation decline.
Rich Beyer, CEO of Freescale since February 2008, has struggled manfully, as you would expect from a former officer in the US Marine Corps, but the level of debt imposed by Blackstone was daunting.
When Beyer took over as CEO of Freescale I told him he was taking on the worst job in the semiconductor industry. And so it has turned out to be.