KKR, Silver Lake agree to buy Philips's chip unit

Kohlberg Kravis Roberts & Co. and Silver Lake Partners agreed to buy Royal Philips Electronics NV's semiconductor unit for € 3.4 billion ($4.4 billion) in the biggest leveraged buyout in the chip industry's history. The buyout group, which also includes AlpInvest Partners NV, will acquire 80.1% of Europe's third-largest chipmaker, Philips said in a statement yesterday. The Amsterdam-based company keeps the rest. The sale is valued at € 8.3 billion including debt and Philips's € 900 million stake. CEO Gerard Kleisterlee sold the unit to concentrate on more stable industries such as medical systems and small appliances. The chip division generated more than € 700 million of operating profit in 2004 and 2005 after losing about € 1.5 billion in the preceding three years. „Philips has already restructured the chip unit,” said Niels de Zwart, an analyst at Rabo Securities in Amsterdam, who had a buy rating on the shares of Europe's biggest maker of consumer electronics as of July 28. Margins are way better. The silicon wafers that Philips makes go into products such as DaimlerChrysler AG's Mercedes cars and Samsung Electronics Co.'s mobile phones. Philips ranks behind Geneva-based STMicroelectronics NV and Munich-based Infineon Technologies AG among European chipmakers.
„There has never been a company of this size and quality in the semiconductor industry that's been up for sale before,” Johannes Huth, KKR's European chief, said in a telephone interview. „It is very well positioned in some areas which we think are poised for growth,” he said, citing chips used in digital TVs and devices used to track goods and people. Huth said he expects to own the business for „five to six years.” The deal tops Bain Capital LLC's $3 billion takeover of Texas Instruments Inc.'s sensors unit in January as  the biggest LBO in the semiconductor industry. The largest technology buyout came last year when New York-based KKR and Silver Lake joined with five other firms to acquire SunGard Data Systems Inc., for $11.4 billion. Philips said it plans to use proceeds from the sale to increase shareholder dividends and stock buybacks to about € 4 billion by the end of 2007. The total includes a € 1.5 billion buyback plan announced July 17. Kleisterlee has announced more than $4 billion of takeovers since July 2005 to spur earnings growth. „We have now practically completed our shift towards more stable, cash generative businesses,” he said in the statement.
KKR, run by Henry Kravis and George Roberts in New York, is the world's largest buyout firm. Last month it teamed up with Boston-based Bain and Merrill Lynch & Co. of New York in an agreement to buy Nashville, Tennessee-based HCA Inc. for $33 billion. The hospital chain will be the largest LBO ever, topping KKR's $31.3 billion purchase of RJR Nabisco Inc. In 1989. Last year, KKR and Silver Lake bought Palo Alto, California-based Agilent Technologies Inc.'s semiconductor unit for $2.66 billion. Silver Lake, with offices in Boston and Menlo Park, California, has biggest technology takeover fund. Buyout firms use a mix of their own funds and debt to pay for takeovers. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors. Philips Semiconductors' private-equity buyers may combine the company with other chipmakers owned by buyout firms or break up the business, Rabo's De Zwart added.
Buyout firms announced an unprecedented $287 billion of takeovers this year through the end of July, up from $265.5 billion during all of 2005, according to Bloomberg data. Usually drawn to companies in industries with steady earnings, they're targeting chipmakers as the industry is forecast to expand over the next three years. Global chip sales are poised to gain 10 percent this year to $250.5 billion after rising 6.8% in 2005, according to a May estimate by the World Semiconductor Trade Statistics. Growth is likely to accelerate to 11 percent next year and 13% in 2008, according to the industry group. Worldwide chip revenue slumped to $139 billion in 2001, when sales had their steepest-ever decline. (Bloomberg)