Blackstone group wins $17.6B Freescale bidding war

September 15, 2006 – Confirming rampant rumors, Freescale Semiconductor Inc. says it has agreed to be acquired for $17.6 billion in cash by a private equity consortium consisting of The Blackstone Group, The Carlyle Group, Permira Funds, and Texas Pacific Group.

Under the deal, unanimously approved by the company’s board, the consortium will purchase all Class A and Class B shares of Freescale for $40/share in cash, about a 36% premium over Freescale’s average closing share price of Sept. 8. That premium has mostly evaporated, however, with Freescale’s stock shooting up 22% this week on the takeover rumors.

Just days ago, speculation began flying that Blackstone was the frontrunner in a bid to acquire the former Motorola chipmaking arm, with a second 11th hour competing bid launched by a rival group including Kohlberg Kravis Roberts and Silver Lake Partners. KKR and Silver Lake led the recent $10.6 billion buyout of Royal Philips Electronics’ former chip unit, leading to speculation that it might combine that business (since relaunched as a new company, NXP) with Freescale.

In revealing its agreement with the Blackstone-led group, Freescale noted a provision that allows it to solicit alternative proposals for 50 days, and if another deal is accepted Freescale would pay an undisclosed breakup fee — perhaps keeping hope alive for the KKR and Silver Lake suitors.

Freescale, spun out of Motorola in 2004, is now the world’s 10th-largest chipmaker with nearly $6 billion in revenues, focusing mainly on embedded chips for markets including automotive and communications. A proposed Freescale/NXP combination would make sense insofar as both companies already partner for semiconductor manufacturing in the Crolles2 alliance in Europe, along with STMicroelectronics.

No matter who ultimately buys Freescale, one of two scenarios is likely to play out, according to American Technology Research analyst Doug Freedman. Freescale could become a consolidating force, buying up other semiconductor companies deemed cheap investments or ones that have synergies in wireless and network processor markets. Or, the company could see more value in splitting off its wireless and TSPG/NCS groups, and sell one to fund expansion of the other, he wrote, in a research note.

Freedman believes that under new ownership, Freescale will consolidate several wireless and data transport semiconductor companies, to develop complete system-level solutions for the communications, automotive, and wireless markets. Revenues could swell to $8-$9 billion over the next 3-4 years — and maybe to $10-$12 billion if additional acquisitions are pursued — with a 18%-25% operating profit, and potential valuation of $30-$32 billion, nearly twice the current bidding price, he noted.


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