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Two private equity consortiums are competing to pull off the largest ever leveraged buyout in the technology sector, with Freescale – the two-year-old semiconductor spin-off from Motorola – their target.
Texas Pacific Group, Blackstone Group, Permira and Carlyle Group have combined in a bid worth more than $16bn for Freescale, based in Austin, Texas, according to people close to the negotiations.
Kohlberg Kravis Roberts, Silver Lake Partners, Bain Capital and Apax have countered with an offer in excess of $16bn and “in some respects, a superior bid”, according to sources.
The second group’s bid is understood to have come late in the day and after the first had spent weeks in negotiations and completed due diligence.
KKR, Silver Lake and Bain’s attempt to steal Freescale from under their rivals’ noses means there is likely to be a three-week delay to the sale process while they carry out their own due diligence.
Freescale confirmed in a statement that it was “in discussions with parties relating to a possible business transaction.” It said there could be no assurances of any result. The private equity groups declined to comment.
Freescale shares closed 20 per cent higher on the news at $37.01, for a market capitalisation of $15.01bn.
If a deal is completed it would exceed the previous record leveraged buyout for the sector – the $11.3bn acquisition of SunGard Data Systems last year.
That consortium included KKR, Silver Lake, Bain, Blackstone and Texas Pacific, who are now on opposing sides in the Freescale bidding.
KKR, Silver Lake and AlpInvest Partners last month bought 80 per cent of Philips’ semiconductor division for €3.4bn ($4.4bn).
Private equity firms are targeting technology firms where solid growth is expected, with the semiconductor industry expecting to see above-average gains over the next few years in some sectors.
Analysts at UBS said the offer price was reasonable for a company that had around $2bn in net cash and was generating $600m to $700m in free cash flow per year.
Freescale’s booming wireless business supplies most of the chips inside Motorola’s RAZR mobile phone and provides key components on the latest Blackberry devices.
It also supplies semiconductors for the automotive industry and makes networking and communications chips.
The cost of insuring Freescale’s bonds against default leapt by more than 200 per cent on news of the bids, making it one of the biggest ever moves in the market for credit default swaps, which offer protection against non-payment of corporate debt. The CDS premium rose by €215,000 per year to insure €10m of Freescale debt over five years from an opening price of about €80,000 per year.
Additional reporting by Paul Davies in London