Freescale IPO, Freefall Redux All Over Again (FSL)

Freescale Semiconductor Holdings (NYSE: FSL) is going to be a disappointing private equity technology IPO if the pricing matters.  That doesn’t mean that shares cannot rise, but the company’s initial public offering is only about 75% of the original amount we expected.  This was not one of our Top 17 IPOs To Watch For 2011, but this needs to be watched because many private equity firms will be looking at the valuation of their portfolio companies which may or may not come back to the public markets.

Freescale has been public before.  It used to be a part of Motorola, then it came public in a spin-off, and then it was taken private.  Its business remains challenged and the metrics of why private equity owners have picked this moment to bring the stock public is somewhat puzzling.  The offering proceeds are also going to almost entirely repay a portion of its $7.5 billion in debt after the semiconductor outfit was leveraged up in a private equity buyout by Blackstone Group L.P. (NYSE: BX), Carlyle, TPG, and Permira.

The problem is that Freescale’s business has not massively recovered in its broad offering of semiconductors.  Still, it has so many clients and so many different chips that Freescale could almost be called General-Semi.  The company’s net sales in 2008 were $5.226 billion. Sales in 2009 were $3.508 billion, and 2010 brought $4.458 billion in sales.  The company had operating losses in each of the last three years. At least that figure last year was “only” $61 million.  If you take a net loss for 2010 before income taxes that was $1.078 billion.

The offering was 43.5 million shares at $18.00 per share.  This week we saw that the range had been cut to $18 to $20 from $22 to $24 per share.  It also looks like this was a disappointing deal on the surface for the private equity firms as it is about half of what was paid before any take-outs were seen while it was private.

The book-runners are Citi, Deutsche Bank, Barclays Capital, Credit Suisse, and J.P. Morgan.  Other underwriters and co-managers are listed as Goldman Sachs, RBC Capital Markets, UBS, Sanford Bernstein, Gleacher & Company, Oppenheimer & Co., Pacific Crest Securities, and Piper Jaffray.

There was a funny story, albeit a sad one, from an internal employee long ago when it was being carved out of Motorola.  I met a Freescale employee on an airplane and she told me that many employees were so unhappy about the business that they would call Freescale by the name “Freefall” when they were not at work.  Apparently the private equity investors didn’t read about that or they thought they could make it different.

JON C. OGG