Private Equity Ruins NXP
When Philips sold NXP to KKR and a consortium of private equity companies, NXP was valued at $11.6 billion.
At the end of Q3 08 Philips valued its 20 per cent stake in NXP at 555m euros which is equivalent to $713 million and which values the entire company at 2.77 billion euros which is equivalent to $3.56 billion.
KKR imposed debt on NXP which currently amounts to $6 billion.
At the end of Q308 NXP had cash of $1.5 billion and, in Q4, it drew down a $400 million borrowing facility making $1.9 billion in total cash.
So NXP has debts of $6 billion, and total cash of $1.9 billion, which equals net debt of about $4 billion secured on a company valued at $3.56 billion.
Next year NXP has to start re-paying the $6 billion or face what could be a very tough environment for re-negotiating the debt.
Who runs their affairs in this crazy way? Only, it seems, a bunch of Wall Street-ers in their 20s with great theoretical financial skills, but zero practical skill at running a business.
On the bio of the new NXP CEO, Richard Clemmer, it makes some play of the fact that Clemmer took an ailing Agere and turned it into a worthy partner for a ‘merger of equals’ with LSI Logic.
That might give some clue as to KKR’s motivation for replacing Frans van Houten with Clemmer. One way out for NXP is a merger with another semiconductor company. Merging with ST or Broadcom would be a very satisfactory result for the long-suffering employees of NXP.
Another way out might be if Philips, which sold 80 per cent of NXP at a total company valuation of $11.6 billion, therefore presumably netting north of $9 billion, decided it might be worth buying the 80 per cent back on a total company valuation of $2.8 billion i.e. for a purchase price of just over $2 billion.
A third way out might be what the financial people call a ‘pre-pack’ insolvency where the owners draw up plan for breaking up the company and then put the company into insolvency.
Then the owners aften buy back the profit-making bits at a low price, while the loss-making bits, plus the debts, are left for the bankruptcy adminsistrators to handle.
In NXP’s case this would leave the bondholders with $4.5bn of worthless bonds secured on loss-making assets. And who are these bondholders? Very often the same financial institutions our governments have been using our money to bail out. So, effectively, the tax-payers get screwed – again.
Whatever happens to NXP, the Wall Steeet Wallys have crippled a great company.
As, Malcolm Penn, CEO of Europe’s leading semiconductor analysts, Future Horizons says: “You’d be better off selling your soul to the Mafia,” than selling a chip company to private equity.
May God preserve us all from Private Equity in 2009.