Blackstone Leads Record Tech Deal

Target: Freescale Semiconductor Inc.

Price: $17.6B ($40 per share)

Sponsors: The Blackstone Group, The Carlyle Group, Permira, Texas Pacific Group

Sellers: Shareholders

Financial Advisors: Target: Goldman, Sachs & Co.; Sponsors: Credit Suisse Securities (USA) LLC, Citigroup Corporate and Investment Banking, Blackstone Corporate Advisory Services

Legal Counsel: Target: Wilson Sonsini Goodrich & Rosati Professional Corp.; Sponsors: Skadden, Arps, Slate, Meagher & Flom LLP

In what could become the largest PE-backed technology buyout to date, The Blackstone Group—backed by The Carlyle Group, Permira and Texas Pacific Group—agreed to pay $17.6 billion to delist Freescale Semiconductor Inc. from the New York Stock Exchange. The deal, scheduled to close sometime in the fourth quarter, would swipe the record from the 2005 take-private of SunGard Data Systems Inc. by a consortium of seven private equity firms.

The quartet will pay $40 per share to acquire all of Freescale’s outstanding Class A and Class B shares, representing a premium of approximately 36% over the company’s average closing share price during the 30 trading days ended Sept. 8, 2006 (the last full day of trading before Freescale announced it was in talks with prospective buyers).

Generating 2005 revenues of $5.8 billion, Freescale designs and manufactures semiconductors for the automotive, consumer, industrial, networking and wireless markets. It is the third largest chipmaker in the U.S. and the ninth-largest in the world.

To be sure, the world of post-bubble technology investing has come a long way since 2001. After several years of thumbing their noses at what many considered too volatile a market, many private equity firms have about-faced their ultra-guarded stance on technology and have begun spending billions in the market—especially for companies that have weathered well through economic cycles.

The most notable of the recent tech deals, of course, is last summer’s $11.4 billion take-private of SunGard Data Systems, which is soon to become the world’s second-largest PE-backed tech deal.

Interestingly, most of the firms involved in the SunGard deal are players in the Freescale buyout, too. Both Blackstone and TPG were part of the SunGard consortium, as was Carlyle, before it opted to bail out shortly before the deal was consummated.

Meanwhile, three other SunGard investors: Kohlberg Kravis Roberts & Co., Silver Lake Partners and Bain Capital—with the addition of non-SunGard investor Apax Partners—reunited late in the Freescale process to make a bid of their own for the semiconductor company, which was unsuccessful.

However, terms of the transaction include a go-shop provision, which gives Freescale the option to solicit alternative proposals until Nov. 3, 2006. If a superior proposal is accepted, Freescale will pay a breakup fee of up to $300 million.

Thomas Thornhill, an analyst for UBS Investment Research, believes that Freescale is still engaged in discussions with the KKR group, which likely has a strategic game plan in mind for the semiconductor supplier.

“The KKR group may be able to offer a higher bid for [Freescale] based on potential cost savings if it can combine the operations of [Freescale] and its recently acquired Philips Semiconductor unit…to realize substantial R&D as well as sales/marketing” synergies, Thornhill wrote to investors.

The semiconductor space has become a substantial driver of private equity spending over the past year. A sampling of some of these recent deals include Golden Gate Capital’s acquisition of Leica Microsystems AG’s semiconductor equipment division; KKR’s and Silver Lake’s $2.8 billion carveout of Agilent Technologies’s semiconductor business (now known as Avago Technologies Ltd.), and Shah Capital Partners’s and August Capital’s, buyout of PulseCore Semiconductor Inc.

Hapoalim Securities analyst Nimal Vallipuram holds that the semiconductor industry will probably continue to see consolidation driven by intellectual property acquisition, market share consolidation and PE-backed buyouts. With respect to the latter, Vallipuram noted that publicly-traded semiconductor vendors, such as National Semiconductor Corp., based in Santa Clara, Calif.; Cirrus Logic Inc., based in Austin, Texas; Infineon Technologies AG, based in Munich, Germany; and Vishay Intertechnology Inc., based in Malvern Pa. are all likely targets of potential take-private transactions.

“All these vendors, according to our analysis, offer attractive valuation, have strong cash flow, require relatively low capital expenditures, and, in some cases offer restructuring opportunities,” Vallipuram notes.

Austin, Texas-based Freescale has been at home on the NYSE since July 2004, when it spun out of parent company Motorola after more than 50 years with the communications equipment company, and some believe the Exchange will eventually be its home once again.

In a note from American Technology Research announcing that it is dropping coverage of Freescale in light of its going private, Analyst Doug Freeman wrote, “We look forward to re-initiating on [Freescale] in 3-5 years…”—thus giving the impression that the buying group’s exit strategy will likely take the form of an IPO somewhere down the line. And given the company’s size, a re-floatation appears to be a safe bet.

Freeman added that the combination of Freescale’s semiconductor consolidation strategy and Blackstone’s “savvy investing” will likely lead to a “significant multiple on [the latter’s] investment a few years down the road.” —A.N.