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STMicro May Be Next Semiconductor Maker Targeted for Buyout

By John Glover and Hamish Risk

Sept. 28 (Bloomberg) -- STMicroelectronics NV, Europe's largest maker of computer chips, may be targeted for a takeover, according to traders betting on the creditworthiness of companies in the credit-default swap market.

The perceived risk of owning STMicroelectronics' $1.6 billion of bonds rose as much as 4.7 percent to its highest in five months, according to data compiled by Bloomberg. Credit- default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.

Merrill Lynch & Co. analysts said in a Sept. 26 report that Geneva-based STMicroelectronics may get a leveraged buyout offer. Blackstone LP offered $17.6 billion for Austin, Texas- based Freescale Semiconductor Inc. this month and Kohlberg Kravis Roberts & Co. agreed in August to purchase NXP BV, the chipmaking unit of Philips Electronics NV in Amsterdam, for 8.3 billion euros ($11.3 billion).

``STM would be a bigger buyout than Freescale or NXP, but in this day and age any company can be bought,'' said Olli Rouhiainen, an analyst at Standard & Poor's in London. ``Ratings will suffer when leverage rises.''

Credit-default swaps based on 10 million euros of STMicroelectronics bonds yesterday rose as high as 26,570 euros per year from 25,250 euros Sept. 26, data compiled by Bloomberg show. The five-year contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the notes should the company fail to meet its obligations on time.

Debt Financing

The contracts rose because an acquisition likely would be funded with debt, leading to lower credit ratings. Leveraged buyout firms typically pay cash for a third of the price of an acquisition and borrow the rest, making the firm's bonds riskier. A rise in credit-default swap prices indicates deterioration in the perception of credit quality; a decline suggests improvement.

STMicroelectronics is rated A3 by Moody's Investors Service and A- by Standard & Poor's. Non-investment grade bonds are rated below BBB- by S&P and Baa3 by Moody's.

``I can see why private equity might be interested in STMicroelectronics,'' said Stuart Reid, an analyst at Fitch Ratings in London, which ranks the company A-. ``It's had reasonably stable cashflows in recent years, it has relatively little net debt, and it's a dominant player in this sector.''

Shares of STMicroelectronics have risen 3 percent this week to 13.34 euros, valuing the company at 12 billion euros.

Semiconductor Volatility

``In the past few days the CDS has experienced some volatility, probably due to M&A activity in general and in the semiconductor sector in particular,'' Maria Grazia Prestini, STMicroelectronics' director for corporate media and public relations, said in an e-mailed statement. ``Despite this volatility, the current level of CDS remains at a historical low level for ST.''

STMicroelectronics' ratio of debt to earnings before interest, tax, depreciation and amortization was 1.4 times as of July 1, according to S&P. NXP's ratio is 4.3 times following debt sales to finance its acquisition by KKR and Bain Capital LLC, according to the ratings company.

``We have no evidence'' a leveraged buyout of STMicro is planned, ``but it seems rational to expect it,'' Merrill Lynch analysts Andrew Griffin, Jonathan Crossfield and Beth Fusco in London wrote in the report. Crossfield declined to comment.

The yield premium on STMicroelectronics' 500 million euros of floating-rate notes due in 2013 widened to 41 basis points more than the euro interbank offered rate, a borrowing benchmark, according to MPS Finance SpA prices. The yield gap is the biggest in a month, MPS data show.

ITraxx Declines

The perception of European credit quality as measured by the iTraxx Crossover Index declined yesterday. The index, which includes 45 companies with investment-grade and non-investment grade ratings, fell to 285,100 euros from 287,000 euros, or 0.7 percent, on Sept. 25. Companies in the Crossover Index have more than $80 billion of bonds outstanding. The average daily fluctuation of the index is 1.32 percent, according to Bloomberg calculations.

The iTraxx Europe Index, which includes 125 companies with investment-grade ratings, fell to 29,900 euros from 30,094 euros.

Credit-default swaps are the fastest-growing part of the $298 trillion market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net