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October 22, 2006 10:18 pm

Investors put pressure on NEC

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NWQ, a Los Angeles-based value investor, has acquired a 10.15 per cent stake in NEC Electronics, in a move that could herald a shake-up at one of Japan’s largest semiconductor groups.

The investments by NWQ and by Capital Research, another value investor, have put NECE in a rare position for a Japanese company: that of dealing with foreign investors intent on having a voice in management.

NWQ increased its stake in NEC Electronics from 9.15 per cent to 10.15 per cent earlier this month, according to documents filed with the Japanese regulator.

Capital Research holds a further 2.97 per cent, according to regulatory filings, while NEC, the parent company, owns 70.04 per cent of NECE, which had a market capitalisation of Y524.8bn at Friday’s close.

NWQ’s decision to build up its stake will put pressure on NEC either to restructure the loss-making operations of its subsidiary and improve shareholder returns or take the company private again just three years after a high-profile listing.

NECE made an operating loss of Y35.6bn on sales of Y645.9bn in the year to March 2006.

NECE shares have fallen sharply since hitting a peak of Y9,450 in October 2003. The shares closed on Friday at less than half that level, at Y4,250, or close to its initial public offering price of Y4,200 in July 2003.

“NEC owning 70 per cent of NECE really leaves it in limbo. They should take it back or spin it off,” says Yoshiharu Izumi, electronics analyst at JPMorgan in Tokyo. NEC has previously bought back listed subsidiaries at a premium, such as NEC Soft and NEC System Technologies, soon after taking them public. An NECE representative said the group was not concerned about NWQ’s investment.

The investment by NWQ highlights increasing private investor interest in semiconductor companies. Just about every private equity investor in Japan is interested in NECE as it is considered undervalued, notes one banker at a Japanese investment bank.

It also comes as two global semiconductor companies – Philips Semiconductor and Free-scale – have agreed to be acquired by private equity groups.

Philips’s semiconductor business was acquired by a private equity consortium for €6.4bn in cash. Freescale is being acquired by the Blackstone Group for $17.6bn, or 2.6 times sales and 10.5 times earnings before interest, tax, depreciation and amortisation. NECE is currently trading at 0.65 times sales and five times ebitda. Analysts note NECE has competitive technology in promising businesses. But the communications division, which makes semiconductors for broadband network equipment and mobile phones, has been underperforming.

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