Reports swirl around SMIC, private equity

January 4, 2007 – China’s flagship foundry Semiconductor Manufacturing International Corporation (SMIC) could be the industry’s next target for private equity investments, according to various media reports, though it’s unclear whether private equity would be able to gain a foothold.

SMIC is the poster child for China’s semiconductor manufacturing activity, with a laundry list of planned fab investments in the next year, but it’s unclear how the firm plans to pay for it all, according to Christian Dieseldorff, senior analyst at Strategic Marketing Associates (SMA), in a recent interview with WaferNEWS. In addition to announced fab expansions at sites in Wuhan and Chengdu, SMIC also has slated a “substantial” buildout at its 300mm/90nm fab in Beijing, a new cleanroom at Fab 4B with plans to equip in 2Q07, and a 300mm Fab 8 in Shanghai expected to start operations in late 2007 — all with an announced 2007 capex budget of just $700 million. “There’s no way they can do that for $700 million,” he said, suggesting that the company appears to be depending upon much more funding than anticipated or announced.

SMIC’s shares on the Hong Kong exchange have surged 21% in the past few days, and jumped 22% in New York on Wednesday, on increased speculation of a pending deal. In the Taiwan Economic News, iSuppli analyst Chang Tsuo-hao mused that one private equity suitor could be the Carlyle Group, which brings to the table two intriguing combinations: recently acquired Freescale Semiconductor and Taiwan packaging and testing firm ASE Inc., which could be combined to bolster SMIC’s operations. If not Carlyle, then other private equity firms could pursue combinations with SMIC and other IC design houses and final manufacturing businesses, the paper noted.

In a filing with the Hong Kong exchange, SMIC indicated that as a matter of course its directors always look for strategic and other opportunities to enhance shareholder value, but the company would not confirm any opportunity now exists or that a decision will be made.

Embracing private equity investment with such combinations would better position SMIC to compete against rivals such as TSMC — particularly given the Taiwan government’s new policy allowing Taiwan chipmakers to move 0.18-micron process technologies over to mainland China.

Clouding the issue are SMIC’s ties to Chinese government entities, which are more interested in building up China’s domestic semiconductor industry than selling to private equity interests. The Shanghai government’s main industrial holding company has an 11% stake in the firm, and the city of Shanghai itself owns 4% of the chipmaker, according to Reuters and the Financial Times. In addition, the government of Wuhan is funding the entire ~$1.2 billion for SMIC’s fab expansion there, and the 200mm Chengdu site likely receives government assistance as well, noted SMA’s Dieseldorff.

SMIC has been approached by private equity investors in the past, but talks never advanced due to management issue, according to a “source familiar with the situation” cited by Reuters. Both Reuters and the Taiwan Economic News pointed out that SMIC’s book valuation, low stock price, low and mounting losses (five of the last six quarters) make it an attractive takeover target. (The Taiwan paper noted, though, that SMIC CEO Richard Ru-Gin Chang expects a return in profitability in 2007 with the adoption of 90nm process technologies.)


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