November 6, 2017 / 5:14 PM / a year ago

Breakingviews - Broadcom faces down ghost of chip LBOs past

One of many Qualcomm buildings is shown in San Diego, California, U.S. on November 3, 2015. REUTERS/Mike Blake/File Photo

LONDON (Reuters Breakingviews) - Chipmakers like Freescale Semiconductor and NXP Semiconductors took a high-profile role in the leveraged-buyout binge that preceded the financial crisis – and the distress that followed it. That makes Broadcom’s roughly $105 billion unsolicited offer for Qualcomm on Monday all the more edgy. The borrowing associated with a deal, if it happens, could be in record amounts and may send debt-to-EBITDA ratios uncomfortably high.

Broadcom boss Hock Tan is facing down two sources of uncertainty. One is whether his counterpart Steve Mollenkopf will engage over the deal, which offers a 27.6 percent premium. So far, Qualcomm’s response has been noncommittal. The other is Qualcomm’s ongoing $38 billion bid to buy NXP – which listed shakily in 2010 and subsequently bought Freescale in 2015. Tan says he’ll take Qualcomm with or without NXP.

Then there’s sheer scale. The bid, worth $130 billion including Qualcomm debt, according to Broadcom, will require nearly $90 billion of cash. Private-equity outfit Silver Lake is providing $5 billion in convertible debt, with the rest to be raised by Bank of America, Citigroup, Deutsche Bank, JPMorgan and Morgan Stanley. Add in the companies’ existing net debt, and the new group’s total would be over $100 billion, even if more cash accumulates before the deal closes. That’s four or five times the $23 billion in combined EBITDA Broadcom is expecting, including cost savings.

Consolidation among makers of chips for mobile phones, cars and the rest is all the rage, and Tan is an experienced dealmaker with a record of bringing debt down quickly after acquisitions. But it’s still a cyclical industry. The merged company would have to keep big customers like Apple happy, which might mean cutting prices. Meanwhile, $3 billion of annual cost-cuts, taxed and capitalised, are worth about the same as the roughly $22 billion premium, so Broadcom isn’t keeping much for its own shareholders.

At least one deal hurdle – the U.S. examination of foreign acquirers – has been pre-empted. The Singapore-domiciled Broadcom will move to the United States, Tan said last week in a press conference with President Donald Trump. Investors seem to have caught the boosterish mood, pushing up the stock of both companies to the tune of more than $20 billion altogether since Thursday. As it happens, both Freescale and NXP survived a turn in the cycle despite excessive leverage. But the distress they went through should give pause for thought.


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