Friday morning, NXP Semiconductors (NXPI 0.25%) announced the early repayment of three term loans, with a total balance of $2.21 billion. Moreover, $500 million of 5.75% bonds will be redeemed for cash in early March.
Through these actions, NXP is taking down its debt balances from $9.2 billion to $6.5 billion. The company's financial leverage, as measured by net debt divided by trailing EBITDA (earnings before interest, taxes, depreciation, and amortization) profits, will sink from 2.45 to a much healthier 1.5. Annual interest expenses will land at $245 million after this flurry of prepayments, down from an annual run rate of $436 million at the end of fiscal year 2016.
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The not-too-casual observer might wonder why NXP is fiddling with its balance sheet right now. Qualcomm (QCOM -0.74%) is buying the company, debt and all, in a blockbuster deal valuing NXP at $47 billion.
That enterprise value isn't changing when cash is used to pay down debt, and Qualcomm's all-cash offer is a firm $110 per share, anyhow. Nothing NXP is doing can add any real value for shareholders now. Right?
Not so fast...
For one, it behooves NXP to run its business to the best of management's ability until the Qualcomm deal closes. Anything less would undermine the value Qualcomm will get out of its enormous purchase, and might even inspire the buyer to cancel the whole deal. So why not set up a more efficient balance sheet and lower interest costs ahead of schedule? Let's keep the wheels greased, in order to reach that final destination without incident.
Beyond that obvious fiduciary duty, NXP had actually promised to do exactly this -- long before Qualcomm came knocking. Last June, when NXP set up another still-pending deal to sell its Standard Products division to a consortium of Chinese investors, management made it clear that the proceeds from that deal would mostly be used for paying down debt. Specifically, CFO Dan Durn promised that "the vast majority of the proceeds [will be] targeted toward the debt portion of the balance sheet."
NXP is setting its financial house in order after taking on $7 billion of new debt to pay for the Freescale merger in 2015. Credit-rating experts pondered these moves, and some noted that NXP's ratings could move into investment-grade territory if the debt-to-EBITDA were reduced to 2.5 or less.
And that's exactly what NXP is aiming for. Whatever happens to the Qualcomm combination, NXP is setting itself up for a high-quality credit rating in the near future.
