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Press releases rarely tell the whole story. Investors should pay attention to three nuggets from management's recent chat with analysts about this important deal.
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NXP Semiconductors CEO Rick Clemmer. Image source: NXP.
NXP Semiconductors (NXPI 0.01%) is selling its standard products division to Chinese investors for a cool $2.75 billion. When that deal was announced last Tuesday, NXP's management held a conference call with financial analysts to explain things in deeper detail.
Here are three of the most important things NXP shared in that call.
Credit rating experts recently set a positive watch on NXP's credit profile, based on the idea that the company will use most of the cash from this deal to pay down debt. Analysts built that assumption on a statement from NXP CFO Dan Durn:
... debt covenants dictate that we have two focus areas: one is reducing overall debt of the company, and two is making acquisitions to increase the asset base and profitability of the company. I think in the near term, given where we sit from an integration standpoint with the Freescale transaction, I think the first of those two will take a disproportionate share of the focus. ...
From an operating cash flow standpoint and a capital allocation policy perspective, I think we've been pretty clear that we're going to take a balanced approach to how we repurchase shares, pay down debt. And with the vast majority of the proceeds targeted toward the debt portion of the balance sheet, in the interim, I think we will focus a bit more heavily with our ongoing operational cash flow on the share capital of the company to the extent it continues to trade below the intrinsic value -- what we believe the intrinsic value of the company is.
In other words, most of the divestiture cash will go toward retiring debt papers in order to fulfill the covenants on NXP's debt papers. The current ratio of debt to EBITDA profits is a little high, but this deal should drop that ratio to a sustainable level. Meanwhile, any other cash needs will be funded by NXP's solid operating cash flows.
For the record, Durn expects a tax bill of roughly $450 million on the total proceeds, leaving $2.3 billion for NXP's own use.
American investors are used to seeing company mergers and spinoffs go through a very familiar set of regulatory clearance steps. But NXP is a Dutch company, and most of the standard products division has nothing to do with America. Therefore, the regulatory hurdles will look a bit different this time: "The regulatory approval process is something that we will have to work through," said CEO Rick Clemmer. "We don't consider there to be any material risk associated with it. The fact is this business is focused primarily in Europe with very nominal resources, actually, in the U.S. And we think that China will be supportive of it, given that the ownership associated with it will be a Chinese buyer."
So Chinese regulators should appreciate this business falling under local management, U.S. bodies shouldn't have much input into this process, and nothing really changes from a European point of view. Clemmer sees smooth sailing ahead, as the deal moves toward closing in the first quarter of 2017.
Image source: Getty Images.
Finally, NXP is bending over backward to create a clean split between the departing standard products division and the rest of the company. All 11,000 of the segment's employees are moving into the new Nexperia operation, led by the same executives and management structure. That being said, NXP will continue to do a lot of work with its former division: "There will definitely be significant shared services," Clemmer said. "We have some manufacturing, for example. The wafer production for the general-purpose logic business will continue to be done for the foreseeable future in existing NXP facilities. There are also shared services in the back-end manufacturing. So there's a significant amount of shared services."
Over time, Nexperia may move out of NXP's manufacturing facilities to depend more heavily on third-party chipmakers. But that will be a slow process, and some of the Nexperia assets will also continue to perform services for NXP. Clemmer estimates that "several tens of millions of dollars a year" will flow between the two businesses. So it's a bit early for Nexperia's management to burn their internal NXP Rolodexes -- and vice versa.